A decline in bitcoin's volatility makes it more attractive to institutions and supports a $130,000 long-term price target, JPMorgan says
- A recent decline in
bitcoin's volatility could boost its adoption by institutions as a low-correlation asset that helps diversify investment portfolios, according to JPMorgan.
- If bitcoin continues to see its volatility converge with gold's volatility, it would fetch a long-term price target of $130,000, JPMorgan said in a note on Thursday.
- "Mechanically, the
bitcoin pricewould have to rise [to] $130,000, to match the total private sector investment in gold," JPMorgan said.
Bitcoin's price volatility has been on the decline in recent weeks, making it more appealing to institutions that are seeking low-correlation assets to better diversify investment portfolios, JPMorgan said in a note on Thursday.
A boost in institutional adoption of bitcoin is "likely to arise from the recent change in the correlation structure of bitcoin relative to traditional asset classes," the bank explained.
One of the biggest barriers to institutions adopting the cryptocurrency has been its markedly high volatility, which exploded in 2020 as bitcoin more than tripled. From a risk management point of view, high volatility "acts as a headwind towards further institutional adoption," JPMorgan said.
Now, there are signs that bitcoin's volatility is normalizing, which would help "reinvigorate" interest by professional investors to include the cryptocurrency in its asset allocations.
One asset that's negatively impacted from bitcoin's growing favor with institutions is gold, which has seen $20 billion in fund outflows since mid-October, compared to $7 billion in bitcoin fund inflows over that same time period, according to the bank.
"Considering how big the financial investment into gold is, any such crowding out of gold as an 'alternative' currency implies big upside for bitcoin over the long term," JPMorgan said.
That upside includes a long-term price target of $130,000, which represents potential upside of 121% from current levels.
"Mechanically, the bitcoin price would have to rise [to] $130,000, to match the total private sector investment in gold," JPMorgan said, based on the current price of gold of $1,700 per troy ounce. JPMorgan previously had a $146,000 long-term price target for bitcoin, but that fell as gold's price has recently fallen from a peak of $1,900 per troy ounce.
"The decline in the gold price since then has mechanically reduced the estimated upside potential for bitcoin as a digital alternative to traditional gold, assuming an equalization with the portfolio weight of gold," the bank explained.
JPMorgan's long-term price target for bitcoin is predicated on the idea that bitcoin's volatility will converge with gold's. That's still far off from happening, as the three-month realized volatility for bitcoin recently stood at 86%, versus just 16% for gold.
"A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is likely a multi-year process. This implies that the above $130,000 theoretical bitcoin price target should be considered as a long-term target," JPMorgan said.
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