This research is the first time outsiders have been able to get a comprehensive look at how the investment bank sees the digital asset space.
deeper into the market than he’s previously done in his weekly reports.
Panigritzoglou has become a well-respected voice in the crypto industry, thanks to his balanced views. He was recently featured on Insider’s list of the 11 crypto masterminds helping Wall Street and clients navigate the digital asset space.
His inaugural report, however, doesn’t look so optimistic for the asset class, which is currently in the midst of a rally where ether, ethereum’s native token, hit all-time highs and bitcoin trades just below record highs.
“Digital assets are on a multi-year structural ascent, but the current entry point looks unattractive in our opinion for an investment horizon of 12 months as bitcoin appears to have returned to overbought territory,” Panigirtzoglou said.
This uptrend implies higher growth for the digital assets in coming years relative to other alternative asset classes, Panigritzoglou said. But in the short-term investors need to be aware of headwinds.
“For an investment horizon of 12 months, we find the outlook for bitcoin and ethereum as challenging at the moment, not only from a valuation point of view, but also from our assessment that bitcoin has returned to overbought territory,” Panigritzoglou said.
Price appreciation looks particularly tricky for ether (ETH), which is currently trading around $4,500.
At the time of JP Morgan’s report, ether was around $4,100, well below its new all-time high of $4,668. It was also well-above the analysts evaluation of ether’s fair value, which they believe is $1,500.
The use for ethereum is the development of the Web 3.0 ecosystem, where data ownership is essential and activities are decentralized. These new decentralized applications can be built on the ethereum blockchain through the use of smart contracts.
Taking this use case into consideration, the analysts used network activity to evaluate the fair value of ether. They found the effects were not strong enough to justify the current price point, given that many investors are pricing in a overly optimistic scenario of future network activity, likely based on the upcoming transition to ethereum 2.0.
Ethereum 2.0 is the point at which the blockchain will move from a proof-of-work consensus model to a proof-of-stake model. This transition will make the network more environmentally friendly and cheaper to use. Ethereum’s been plagued with slow transaction speeds and high fees.
“Bitcoin is unique in terms of its perception of digital gold and faces no competition from other cryptocurrencies,” Panigirtzoglou said. “Instead, ethereum’s blockchain is facing stiff competition from current and new blockchains, which are effectively trying to replicate ethereum blockchain’s functionality for smart contract, DeFi, NFTs and other applications.
“In turn, this creates the risk that the substantial increase in the ethereum network activity over the coming years embedded in the current price of $4,100 might not materialize.”
The analysts expect a downside of around 67% based on the fair value price.
The analysts have a more positive long-term outlook on bitcoin (BTC), when compared with ethereum. Over the long-term their price target is $146,000, with some caveats, and a short-term target of $73,000 for 2022.
This view is based onand bitcoin’s ability to operate as digital gold. Bitcoin has similar qualities to gold, in that it has a finite supply and no central ownership.
In recent months, gold has failed to respond to heightened concerns over inflation, Panigirtzoglou said. At the same time, investors have had a renewed interest in bitcoin as an inflation hedge.
“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,” Panigirtzoglou said.
But this upside is based on the idea that volatility of bitcoin can converge to that of gold over the long term.
Institutional investors look at each asset class based on the risk capital. Currently, bitcoin exceeds that of gold in terms of risk capital, however if it were to become less volatile, more institutional investors might look to adopt bitcoin.
“A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is in our mind a multiyear process,” Panigirtzoglou said. This implies that the above $146k theoretical bitcoin price target should be considered as a long-term target, and thus an unsustainable price target for the near term.”
Bitcoin’s volatility relative to that of gold peaked at six times in the second quarter of this year, but has since slowed to around four to five times. If volatility could continue to subside to around two times, then bitcoin’s fair value could increase to $73,000 in 2022.
“Assuming a stable bitcoin share of 45% in the total crypto market, this implies upside potential of around 15% for digital assets over the coming year,” Panigirtzoglou said.
However if volatility should pick up again, the outlook is less optimistic.
“In our opinion, unless bitcoin volatility subsides quickly from here, a price level of close to $35k should be considered as fair value at current levels of volatility,” Panigirtzoglou said.