J.P. Morgan Predicts Double-Digit Gains for Bitcoin. The ECB Sees Risks.

Bitcoin was trading around $29,800, implying gains of around 27% to his price target. The token has fallen sharply in the past month as demand for tech investments has weakened in response to rising interest rates and a deteriorating macro outlook, with a potential recession on the horizon in the U.S.

The crypto markets have also been undermined by the collapse of TerraUSD, a so-called algorithmic stablecoin that recently lost its peg to the dollar, wiping out several billion dollars worth of tokens. Algorithmic stablecoins generally aim to hold a peg to the dollar through arbitrage mechanisms with other tokens, rather than being backed by reserve assets in a one-to-one ratio.

The demise of TerraUSD appears to have fueled selling in other areas of crypto, including trading and lending activity on decentralized-finance networks. Exchange-traded funds holding Bitcoin futures have also seen the largest outflows of investment dollars since a downturn in tech in May and June 2021.

Despite the weakness in crypto, it now looks more attractive as an alternative asset than real estate, according to Panigirtzoglou, who says that property valuations may still not fully reflect the toll of rising interest rates.

At the same time, selling pressure may have gone too far. Bitcoin and Ethereum futures are “approaching oversold territory,” writes Panigirtzoglou. Traders have also piled into stablecoins, essentially moving into crypto cash, which could also be a bullish signal since so much money is now on the sidelines.

“The share of stablecoins in total crypto market cap looks excessively high, pointing to oversold conditions and significant upside for cryptomarkets from here,” Panigirtzoglou writes.

One other positive trend is that venture capital investment shows no signs of letting up. Of the $25 billion of venture capital funding that went into crypto this year, nearly $4 billion came after Terra’s huge declines, Panigirtzoglou says.

One of the largest Silicon Valley venture firms, a16z, said on Wednesday that it had launched a new $4.5 billion crypto fund, taking its total investment in the sector to $7.6 billion.

The VC funding could be crucial to helping the industry avoid another “crypto winter,” the sector’s term for a prolonged downturn, according to Panigirtzoglou. The last winter, from late 2017 to late 2020, saw Bitcoin collapse by more than 80%, taking three years to recover to its previous high.

Granted, all the money flowing into crypto projects doesn’t mean that they’ll pay off for owners of the tokens. Much of the profits in crypto issuance go to early investors and founders of blockchain projects. Many tokens see the biggest gains after they get listed on a major exchange. And the collapse of TerraUSD and its related token, LUNA, only highlights the growing risks of highflying coins.

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

In a report on Wednesday, the ECB said that crypto asset markets now represent less than 1% of the global financial system. That isn’t trivial, and despite recent declines, the market is now similar in size to the “securitized subprime mortgage markets that triggered the global financial crisis of 2007-08,” it said.

“If the present trajectory of growth in the size and complexity of the crypto-asset ecosystem continues, and if financial institutions become increasingly involved with crypto-assets, then crypto-assets will pose a risk to financial stability,” the ECB concluded.

ECB President Christine Lagarde also warned of risks in crypto, saying in an interview, “my very humble assessment is that it is worth nothing.” She called for more regulation to protect investors.

Write to Daren Fonda at daren.fondabarrons.com