Crypto Market Faces Potential Downturn as CME Futures Demand Drops

The crypto market is facing a potential downturn, according to JPMorgan analysts, as demand for CME bitcoin and ether futures has dropped. The market has seen a 15% decline from its peak of $3.72 trillion on December 17 to about $3.17 trillion, signaling a significant correction. This decline has brought CME bitcoin and ether futures close to "backwardation," where future prices are lower than spot prices, a situation similar to what happened last June and July.

JPMorgan analysts warn that this shift indicates weaker demand from institutional investors using regulated CME futures to invest in bitcoin and ether, suggesting less confidence from major players in the market. When demand for bitcoin and ether futures is strong, they usually trade at a premium to spot prices, called "contango." This premium, often over 10% a year, is driven by the high "risk-free" rate in crypto, where lending USD can earn 5%-10% annually. However, when demand drops and expectations for prices weaken, futures can fall below spot prices.

The analysts note that the drop in demand for CME bitcoin and ether futures is likely due to two main reasons. First, some institutional investors are cashing out because there aren't any immediate positive triggers. They also noted that big crypto moves from the new U.S. administration probably won't happen until later in the year, so investors are holding off for now. Secondly, funds that follow market trends, like commodity trading advisors, have been pulling back, which is also hurting demand. The analysts pointed out that both bitcoin and ethereum have been losing momentum, with ethereum's momentum turning negative. Because of this, they warn that crypto markets could keep facing challenges in the near term.

In a recent post, Cryptoquant CEO Kim Young Ju noted that while Bitcoin ETF demand has slowed, it remains net positive. He added that this bull cycle will continue until significant ETF outflows occur. Prolonged net negative demand would signal the start of a bear cycle. "Demand and supply are all that matter; everything else is just noise," he said. The current slowdown in Bitcoin ETF demand, while still positive, has important implications. Ki Young Ju suggests that the ongoing positive demand could keep the bull market going. However, traders should watch for signs of large ETF outflows, which might indicate a shift toward a bear market.