Despite Market Doldrums and ECB Warning, J.P. Morgan Predicts Significant Growth of Bitcoin

Despite apparent doldrums engulfing cryptocurrencies nowadays, J.P. Morgan Chase (JPM) strategists are forming a very positive outlook on the prospects for the world's most popular cryptocurrency, Bitcoin (BTCUSD) even as the European Central Bank warns again of rising risks in this asset class.

Bitcoin’s volatility against gold eased marginally, suggesting a $38,000 “fair value” for the cryptocurrency and implying “significant upside potential for digital assets,” J.P. Morgan’s strategists team led by Nicholas Panigirtzoglou wrote in an analyst note published this Wednesday.

Digital assets have replaced real estate as a preferred alternative asset class, according to the JPMorgan's alternative investments outlook and strategy note. "While public markets already price in significant recession risks, and digital assets have repriced significantly following the collapse of terra USD [UST], some alternative assets such as private equity, private debt and real estate appear to have lagged somewhat, we thus replace real estate with digital assets as our preferred alternative asset class."

As for alternatives overall, the team downgraded them to underweight from overweight, expecting traditional assets to return 12% over the coming year versus just 10% for alternatives.

At the same time, selling pressure may have gone too far. Bitcoin and Ether futures are “approaching oversold territory,” wrote Panigirtzoglou. Traders are also investing in stablecoins, essentially switching to cryptocurrencies, which can also be a bullish signal.

Bitcoin is currently traded slightly below $29,000. The bluechip token fell sharply last month as demand for technology investment weakened in response to higher interest rates and a worsening macro outlook, with a potential U.S. recession lurking on the horizon.

Looking more broadly at crypto, they said the Terra collapse has crushed sector sentiment, thus offering a "good entry point" for longer-term investors. The key to avoiding a "long winter" akin to 2018-2019, they say, will be venture capital funding, and thus far there's little evidence that has dried up.

In addition, they noted, there hasn't been much spillover to other stablecoins, and the total value locked in decentralized finance (DeFi) projects excluding Terra has been "relatively resilient."

The recent downward moves in bitcoin (BTC) and the broader crypto market feel "like capitulation," said Panigirtzoglou and colleagues. Based on the bitcoin-gold volatility ratio, they peg fair value for the most popular of cryptos at $38,000, or nearly 30% above the current price.

“The share of stablecoins in the total crypto market capitalization looks excessively high, indicating oversold conditions and significant upside potential for cryptocurrencies,” writes Panigirtzoglou.

Another positive trend is that venture capital investment shows no signs of abating. Of the $25 billion in venture capital funding that has been invested in crypto this year, nearly $4 billion came from Terra’s recent decline, Panigirtzoglou said.

One of Silicon Valley's largest venture capital firms, a16z, said recently that it has launched a new $4.5 billion crypto fund, bringing its total investment in the crypto sector to $7.6 billion.

Venture capital funding could be critical to helping the industry avoid another “crypto winter,” Panigirtzoglou wrote. From the end of 2017 to the end of 2020, Bitcoin shed by more than 80% and it took three years to recover to its previous high.

Financial regulators are also signaling growing concerns. The latest warning shot came from the European Central Bank.

In a report on Wednesday, the ECB proclaimed that crypto asset markets currently represent less than 1% of the global financial system. This is not trivial, and despite recent declines, the market is now similar in size to "the securitized subprime mortgage markets that caused the 2007-08 global financial crisis."

“If the current trajectory of growth in the size and complexity of the cryptoasset ecosystem continues, and if financial institutions increasingly engage with cryptoassets, then cryptoassets will pose a risk to financial stability,” the ECB concluded. ECB President Christine Lagarde also warned about the risks in cryptocurrencies, saying in an interview in Davos: “My personal assessment is that these (crypto assets) are worth nothing.”