The strategy is more important than miners for Bitcoin's price: JPMorgan

According to JPMorgan analysts, the “resilience” of Strategy plays a key role in Bitcoin’s short-term price movements, even more important than the increased selling pressure from miners — even though Strategy, the world’s largest bitcoin holder, has yet to sell any coins.

In a Wednesday report, the analyst group led by managing director Nikolaos Panigirtzoglou stated that bitcoin’s recent price has been pressured by two factors: the decline in hashrate and network mining difficulty, and developments related to Strategy.

The decrease in hashrate and difficulty stems from two causes: China reaffirming its mining ban after a surge in private mining activity, and high-cost miners outside China being forced out due to low bitcoin prices and rising energy costs squeezing profit margins.

Normally, a drop in hashrate would help boost miner revenues. However, according to JPMorgan, “bitcoin’s price remains below its production cost,” resulting in selling pressure on the largest digital asset.

JPMorgan currently estimates bitcoin’s production cost at $90,000, down from $94,000 last month. This price assumes an electricity cost of $0.05/kWh; every $0.01/kWh increase adds about $18,000 to the production cost for high-cost miners.

The report points out: as electricity costs climb and bitcoin prices fall, many high-cost miners have been forced to sell bitcoin in recent weeks.

Nonetheless, the analysts emphasize that miners are not the decisive factor for bitcoin’s next move. Instead, the market is watching Strategy’s balance sheet and the company’s ability to avoid selling bitcoin.

Signals from Strategy

Strategy’s enterprise value-to-bitcoin holdings ratio — calculated as the total market value of debt, preferred shares, and equity divided by the market value of bitcoin held — currently stands at 1.13 after a steep decline in the second half of this year. The fact that this ratio remains above 1 is considered “positive,” as it suggests Strategy does not yet face pressure to sell bitcoin to cover interest or dividends.

“As long as this ratio stays above 1 and Strategy avoids selling bitcoin, the market will be reassured and the worst phase for bitcoin’s price may have passed,” the report writes.

The analyst group also notes the $1.44 billion reserve fund recently established by Strategy, which can cover up to two years of dividend and interest obligations — significantly reducing the risk of forced bitcoin sales in the near future.

Although the pace of bitcoin accumulation has slowed, with some weeks seeing no purchases, Strategy continues to expand its reserves and this week announced its holdings have surpassed 650,000 BTC.

Risk of removal from MSCI “mostly priced in”

The market is now watching to see whether MSCI will remove Strategy and other digital asset-holding companies from its index basket. According to JPMorgan, the impact of this decision will be “asymmetric.”

Any downside from removal is expected to be limited, as this risk is “largely priced in.” From October 10 — when MSCI announced its consultation — to December 2, Strategy’s stock fell 40%, underperforming bitcoin by 20%, equating to a loss of about $18 billion in market value. This sharp decline suggests the market has already priced in the risk of being removed from MSCI, and possibly from other major indexes as well.

Last month, JPMorgan estimated that removal from MSCI would trigger $2.8 billion in outflows from Strategy, and $8.8 billion if other indexes follow suit. At the time, co-founder and executive chairman Michael Saylor said: “Index classification does not define us. Our strategy is long-term and our conviction in bitcoin remains unchanged.”

JPMorgan believes MSCI’s upcoming January 15 decision will be significant for Strategy and bitcoin’s trajectory, but a negative outcome is unlikely to create further substantial selling pressure.

Conversely, if Strategy is retained, both the stock and bitcoin “are likely to strongly recover” to levels seen before October 10 — the date of the largest liquidation event in crypto history.

Production cost may provide a “soft floor,” long-term outlook remains positive

If bitcoin’s price falls below the new production cost of $90,000 and stays there for an extended period as in 2018, many miners will come under pressure, pushing overall production costs even lower. History shows that production cost often acts as a “soft floor” for price.

Despite considerable short-term volatility, the analyst group reaffirms bitcoin’s long-term prospects. Comparing bitcoin’s volatility to gold suggests a fair value of up to $170,000, opening up significant growth potential over the next 6–12 months if the market stabilizes.

Vuong Tien