JPMorgan Flags Waning ‘Debasement Trade’ as Bitcoin and Gold Lose Safe-Haven Luster

New analysis from JPMorgan Chase indicates a significant cooling of the “debasement trade” – a strategy that has historically underpinned the strong performance of Bitcoin and gold. As global investors reassess risk and reward, capital flight from these assets, particularly Bitcoin, has notably accelerated in recent weeks.

A research team led by Nikolaos Panigirtzoglou, Managing Director at JPMorgan, highlighted in a recent report that gold ETFs experienced a substantial sell-off in the week ending June 5, registering net outflows of $20 billion after a brief period of inflows. Concurrently, outflows from Bitcoin spot ETFs have steadily intensified over the past four weeks. The analysts stated:

“We are observing a broad-based exodus from the ‘debasement trade’ across both retail and institutional investors. This capital flight has not abated in the gold market and has even pressed the accelerator in the Bitcoin market in recent weeks.”

The “debasement trade” refers to a hedging strategy where investors acquire Bitcoin and gold to diversify away from a singular reliance on the U.S. dollar. This is typically in response to macroeconomic risks such as geopolitical instability, persistent inflation, escalating government debt, and waning confidence in fiat currencies.

However, JPMorgan’s analysis reveals that this defensive buying has quietly unraveled in recent weeks, evident across ETF flows, futures markets, and investor asset allocations.

Institutional Retreat: Shrinking Longs and Surging Shorts Amplify Downside

It’s not just retail investors pulling back; institutions are also actively reducing their exposure through the futures market. The report points out that gold long positions have been consistently shrinking since late February. Bitcoin, which had been a primary beneficiary of the debasement trade since the outbreak of the Middle East conflict, saw a reversal in early May, followed by a period of sustained weakness.

JPMorgan’s market momentum indicators corroborate this trend. Gold investors have been aggressively cutting long positions since late February. While Bitcoin initially benefited from short covering, it ultimately succumbed to heavy selling pressure and reversed downwards in early May. The analysis team further added that newly established short positions in the market threaten to further amplify gold’s downside.

Furthermore, analysts tracked the allocation of non-bank investors to Bitcoin and gold relative to traditional assets like stocks, bonds, and cash. Data indicates that these defensive allocations, which had climbed steadily since mid-2023, have now fallen significantly to levels last observed in early 2024.

JPMorgan also underscored that weakening liquidity in both ETF and futures markets is exacerbating the downward pressure on Bitcoin.

Eroding Safe-Haven Status: Bitcoin and Gold Increasingly Behave Like ‘Risk Assets’

The report also highlights a critical shift in asset correlations that warrants investor caution.

Recently, Bitcoin’s correlation with the U.S. 10-year real yield has turned negative, mirroring gold’s trajectory earlier this year. This implies that in the current high-interest-rate environment, the opportunity cost of holding non-yielding assets continues to climb, placing significant pressure on both gold and Bitcoin.

Concurrently, gold’s correlation with the S&P 500 has increasingly aligned with Bitcoin’s, exhibiting a positive correlation with equity markets. This suggests that rather than serving as “safe-haven tools” for portfolio diversification, both assets have recently performed more like “risk assets” that move in tandem with the broader market.

Cautious H2 Outlook: Short-Term Pessimism Could Signal Contrarian Opportunity

This latest report largely maintains JPMorgan’s previously expressed cautious stance on digital assets. Analysts reiterated that for the cryptocurrency market to experience a robust rebound in the second half of the year, two key prerequisites must be met:

• Enhanced Corporate Transparency: Digital asset reserve companies need to provide clearer guidance on how they plan to fulfill increasing dividend issuance obligations, for instance, by rebuilding U.S. dollar reserve funds to bolster confidence.
• Regulatory Breakthrough: The U.S. cryptocurrency market structure bill must successfully pass. However, JPMorgan currently assesses the probability of this bill passing as less than 50%.

Despite the overall cautious tone, JPMorgan’s report also noted that the current weak market sentiment has historically, at times, served as a “contrarian bullish signal.” In the long run, this short-term pessimism might ultimately present a pivotal opportunity for a contrarian upturn.