The recent rally in bitcoin prices is unlikely to last, according to J.P. Morgan.
Bitcoin’s price had rallied as much as 15% since bottoming at $33,472 a coin on Tuesday, but analysts at J.P. Morgan say a shift in the structure of the market signals there is further weakness on the horizon. The cryptocurrency has plunged 41% from its April peak.
"The shift in Bitcoin futures into backwardation is a bearish signal," wrote J.P. Morgan analysts led by Nikolaos Panigirtzoglou. They noted this was the first time the market has been in backwardation since a vicious bear market wiped out 83% of the cryptocurrency’s value.
Backwardation occurs when the spot price is higher than the futures price, meaning investors are willing to pay a premium to hold bitcoin now.
Backwardation is "an unusual development and a reflection of how weak Bitcoin demand is at the moment from institutional investors" who use CME Group futures to gain exposure, the report said.
The analysts noted that bitcoin’s low share of the crypto market is also worrisome.
Bitcoin’s share of the market declined to about 40%, down from about 70%, during the recent selloff, which is similar to the drop that occurred in December 2017, the peak of bitcoin’s last bull market. Bitcoin’s market capitalization on Thursday was $695 billion compared to $1.6 trillion for the entire crypto universe, according to CoinMarketCap.com.
"We believe that the share of Bitcoin in the total crypto market would have to normalize and perhaps rise above 50% (as in 2018) to be more comfortable in arguing that the bear market is behind us," the analysts wrote.