JPMorgan casts doubt on sustainability of strong cryptocurrency inflows

JPMorgan expressed uncertainty over the sustainability of the robust net inflows into cryptocurrencies so far this year.

Year-to-date crypto net inflows of $12B – which could grow to $26B by the end of 2024 should flows continue at the same pace – has largely been driven by the allure of spot bitcoin (BTC-USD) exchange-traded funds, analyst Nikolaos Panigirtzoglou wrote in a recent note.

Such bitcoin-holding products have attracted $16B of net inflows since inception, the note said. Adding CME (CME) futures flows and capital raised by crypto venture capital funds, total crypto inflows have reached $25B year-to-date.

Though an impressive number, Panigirtzoglou signaled that it may not fully represent new money entering the crypto space. “We believe there has likely been a significant rotation away from digital wallets on exchanges to the new spot bitcoin ETFs,” he explained.

This shift is noticeable, he noted, as bitcoin (BTC-USD) reserves on exchanges have dropped by 220K BTC, or $13B, since the ETFs launched in January. “This implies that the majority of the $16B inflows into spot bitcoin ETFs since launch likely reflects a rotation from existing digital wallets on exchanges.”

He attributed the rotation to “the cost effectiveness, deeper liquidity, regulatory protection and convenience of the ETF wrapper that has become market participants’ preferred choice of instrument for bitcoin exposure for both existing and new crypto investors.”

In all, the analyst is skeptical that crypto inflows will continue at the same clip for the rest of the year, given how high the price of bitcoin (BTC-USD) is relative to the cost to produce one or relative to gold.

Indeed, bitcoin’s (BTC-USD) price has moved up markedly this year, jumping some 51%, having reached an all-time high of over $73K in March. Since hitting its peak, the token has been consolidating in the $59K-$71K trading range as investors search for potential catalysts. BTC changed hands at $65.4K in Friday afternoon trading.

Most Seeking Alpha analysts are bullish on bitcoin (BTC-USD). However, JH Research thinks “the lackluster and declining media attention and interest in Bitcoin far outweighs the effects of” several “events on the horizon that are likely to cause marginal demand growth.”

The SA contributor noted searches and price rallies have a strong historical relationship. “Significant rallies have only taken place in conjunction with climbing attention and interest, something which isn’t present currently.”