JPMorgan Chase: Bitcoin liquidity will gradually recover and remain strong

Earlier this week, Bitcoin saw a sell-off of nearly 15% as leveraged long positions were quickly liquidated, JPMorgan analysts said on Wednesday. Since then, the market appears to have stabilized and the biggest liquidation crisis has passed.

The recovery in hash rate and signs of more efficient arbitrage trading suggest that Bitcoin liquidity will continue to improve from here.

JPMorgan analysts said: "Although it will take a few days, history shows liquidity should recover quickly. Looking ahead, Bitcoin liquidity should remain strong and resilient. Large exchanges are recovering faster than other asset classes."

The report also mentions the unique value of having 24/7 access to stable liquidity pools in the cryptocurrency market, which could contribute to overall stability.

The sell-off may have been exacerbated by the prevalence of high-frequency market making, which accounts for an estimated 80% of liquidity on major cryptocurrency exchanges and is prone to runs when threatened by a spike in volatility.

Momentum signals will break down if the largest cryptocurrency, Bitcoin, does not break above $60,000 soon, JPMorgan wrote in a report.

“In the past few days, the Bitcoin futures market has experienced significant liquidations similar to those seen in mid-February, mid-January, or late November last year,” the strategists said. “Given that momentum signals remain elevated, they will naturally decay in the coming months.”

“Whether we will see a repeat of what happened before in the current climate remains to be seen.” They added that the likelihood of this happening again appeared low and inflows into bitcoin funds appeared to be minimal.

Bitcoin rose to $64,870 when it was listed on Coinbase Nasdaq, but has since retreated to $54,186. The cryptocurrency is still up about 90% so far this year.

Bitcoin has fallen in five of the past six trading days and is currently struggling to surpass its 50-day moving average of around $56,819. This is a bearish indicator for many chart analysts as it tends to determine price momentum trends. If Bitcoin is unable to break above the short-term trendline, it could move lower and test the $50,000 level, which would be about 10% down from current trading levels. The next level of support would be the 100-day moving average around $49,212, which would imply an 11% drop from Wednesday's trading levels.