Crypto Markets Face Near-Term Downturn: JPMorgan Warns of Weakening Demand

Cryptocurrency markets, led by Bitcoin, are facing near-term downside risks, according to a recent note from JPMorgan. The bank highlighted a decline in the total crypto market cap, which has fallen by 15% from its record high of $3.72 trillion in December 2024 to $3.17 trillion currently. This decrease signals a loss of investor confidence in the market.

JPMorgan analysts pointed to trends in the futures market as a key warning sign. Both Bitcoin and Ethereum futures have approached backwardation, where futures prices fall below spot prices. This shift is indicative of demand weakness among institutional investors who use regulated CME futures contracts to gain exposure to these cryptocurrencies.

Under normal conditions, futures for Bitcoin and Ethereum trade at a premium to spot prices, a market structure known as contango. This spread is often driven by high interest rates in crypto lending, which range between 5% and 10% annually. However, when demand and price expectations weaken, the futures curve shifts towards backwardation, as seen in June and July last year.

The bank cited two primary reasons for the weakening demand. First, institutional investors may be taking profits amid a lack of short-term catalysts. JPMorgan noted that crypto initiatives by the new US administration are more likely to take place in the second half of the year. Until then, weakening demand poses downside risk to crypto markets.

Second, momentum-driven funds such as CTAs are pulling back. JPMorgan noted that momentum decay has been hitting both Bitcoin and Ethereum, with Ethereum's momentum signal already turning negative. Without fresh catalysts, crypto markets could face further downside pressure in the near term, the firm warned.