Strategists flag near-term risks for bitcoin price outlook

Strategists are struggling to see a turnaround ahead for Bitcoin, at least for now, as the digital coin looks to consolidate above the $30,000 level.

The near-term setup is "challenging," a JPMorgan Chase & Co. team including Josh Younger and Veronica Mejia Bustamante wrote in a note Friday, while Fundstrat Global Advisors LLC's David Grider recommended reducing risk or buying some protection.

The JPMorgan team said blockchain data suggests recent cryptocurrency sales were made to cover losses and that "there is likely still an overhang of underwater positions which need to be cleared through the market." Bitcoin has roughly halved from a peak near $65,000 in April, hurt by a cryptocurrency clampdown in China, tightening regulatory scrutiny elsewhere and concerns that the servers underpinning the virtual coin consume too much energy.

The prospect of reduced emergency stimulus amid the recovery from the pandemic may also be an obstacle for the most speculative investments.

Still, the JPMorgan strategists pointed to stability in the Bitcoin futures market as a positive factor, alongside the possibility of increased production costs as China's crackdown pushes Bitcoin mining abroad. Some researchers argue the marginal production cost plays an important role in Bitcoin prices.

So while the "cryptocurrency market shows signs that it is not yet healthy, it does also appear to be beginning the process of healing," they wrote.

The largest cryptocurrency rose as much as 6.5% to $33,329 on Sunday, snapping a two-day drop. Other coins rallied too, with Ether up more than 5%. Some chart watchers view the $30,000 level as key for Bitcoin, contending a decline below it could open the way to retreat to $20,000. Grider, lead digital asset strategist at Fundstrat, noted that a large short position has been building again on the crypto exchange Bitfinex - and said the last time there was a similar situation, negative news out of China took prices lower.

Meanwhile, Fundstrat Global Advisors has issued a word of caution to its bitcoin and crypto investing clients, advising them to take some risk off the table, or hedge their bets, over the weekend, due to brewing concerns about mounting leverage in the nascent market.

"We think it's possible that the selling we've seen over the last day or so is related to concerns over leverage and counterparty risk of some lenders," wrote David Grider, lead digital asset strategist at Fundstrat. Counterparty risk refers to the possibility that a trading partner runs into trouble and is unable to fulfill obligations usually tied to derivatives contracts.

At last check Saturday, bitcoin BTCUSD, +7.10% was trading down over 4%, changing hands at $31,481.62, but off a low, under $30,000, for the world's No. 1 crypto put in earlier in the week.

Fundstrat, an independent research shop, co-founded by prominent bitcoin bull Tom Lee, pointed to a Thursday tweet by crypto mogul Barry Silbert, who offered his own words of caution about counterparty risk and leverage in crypto that could potentially translate into further turbulence in digital-asset markets.

Silbert warned that there is a "daisy chain of borrowers and lenders in the crypto space…and warned that it is "important to understand counterparty risk" and where the weak links in the chain are.

Silbert is considered a luminary in the world of digital assets, after founding two of the most widely known enterprises in crypto: Grayscale Investments, which runs the popular

Grayscale Bitcoin Trust GBTC, 6.52%, and the Digital Currency Group, which also owns CoinDesk. Worries about leverage in crypto come amid the broad swoon in crypto that has taken down values in bitcoin, as well as Ether ETHUSD, +7.05% on the Ethereum blockchain, and meme assets like dogecoin DOGEUSD, +6.89%.

Bitcoin is down over 50% from its mid-April peak, Ether is off 60% from its all-time high in May and dogecoin is down nearly 70% from its record high achieved early last month.

To be sure, the appeal of those assets is their outsize year-to-date returns, with dogecoin boasting an over 5,000% gain so far in 2021, Ether up more than 140% in the first six months of this year.