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Bitcoin plunges: A bust or a buy?

ForexMay 19, 2021 05:39PM ET
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2/2 © Reuters. FILE PHOTO: The logo of the Bitcoin digital currency is seen in a shop in Marseille, France, February 7, 2021. REUTERS/Eric Gaillard 2/2

By Tommy Wilkes, Sujata Rao and Gertrude Chavez-Dreyfuss

NEW YORK/LONDON (Reuters) -Cryptocurrencies that seemed to be defying gravity just weeks ago came back down to earth with a bump on Wednesday after a roller-coaster ride which could undermine their potential as mainstream investments.

The two main digital currencies, bitcoin and ether, fell as much as 30% and 45% respectively, but significantly pared losses after two of their biggest backers - Tesla (NASDAQ:TSLA) Inc chief Elon Musk and Ark Invest's Chief Executive Cathie Wood - indicated their support for bitcoin.

While many analysts thought the explosion in crypto interest this year was not sustainable, the trigger for the shake-out was China's move on Tuesday to ban financial and payment institutions from providing cryptocurrency services. It also warned investors against speculative crypto trading.

At one point on Wednesday nearly $1 trillion was wiped off the market capitalization of the entire crypto sector. In early afternoon trading, their market cap was $1.8 trillion, according to data tracker CoinGecko.com.

"It's not just a small segment of the world that is affected by cryptocurrencies; it's now mainstream," said Tom Plumb, portfolio manager of the Plumb Balanced Fund.

In other markets, a move into safe-haven U.S. Treasury securities initially knocked yields lower, although yields rose after the release of minutes of the Federal Reserve's latest meeting, while U.S. stock indexes logged losses.

"There's a lot of leverage embedded into crypto stocks so there will be a spillover effect into equity markets in the short term and there is also quite the inflation fear as the market thinks the Fed might have to hike rates abruptly if prices keep rising," said Thomas Hayes, chairman and managing member at hedge fund Great Hill Capital LLC.

Federal Reserve officials played down any risk to the wider financial system.

"By itself I don't see that as a systemic concern at this point," St. Louis Federal Reserve president James Bullard said. "We are all quite aware that crypto can be very volatile."

Bitcoin, the biggest and best-known cryptocurrency, had already been under pressure from a series of tweets from Tesla's Musk.

Cryptocurrency price declines last week were sparked by Musk's reversal on Tesla accepting bitcoin as payment, citing the heavy environmental toll of "mining" bitcoin, which requires a lot of electricity to power the computers that create bitcoin.

Amid Wednesday's crypto sell-off, Musk tweeted a 'diamond hands' emoji https://twitter.com/elonmusk/status/1395027147161489412?s=20, used in social media to signal a position is worth holding on to.

"His tweet definitely helped the recovery," said Mike Venuto, founder and chief investment officer at Toroso Investments, which oversees $7 billion in assets. "Would it have recovered some without it? Yes. But would it have recovered nicely? Maybe not."

Bitcoin has dropped some 40% from a record high of $64,895 hit on April 14. On Wednesday, it hit a low of $30,066 and was last down 13% at $37,323. Tesla shares fell 2.5%.

"Bitcoin's sharp price drop should come as no shock to the market," said Gavin Smith, CEO of crypto consortium Panxora.

"Any asset which has risen as much as bitcoin over the past year can be expected to have pullbacks as some investors withdraw profits, like we're currently seeing."

Bitcoin's decline whacked other crypto assets, with ether, the coin linked to the ethereum blockchain network, last down 22.5% at $2,620.

Meme-based dogecoin also tumbled, losing nearly 26%, at 35 cents, according to Coingecko.

Amid the volatility, cryptocurrency trading platforms Coinbase and Binance said they were investigating or experiencing some service issues. Shares in Coinbase dropped 5.9% on Wednesday.

Technical factors were also said to be at play as bitcoin appeared to accelerate once it fell below its 200-day moving average, a chart position which traders follow.

"The crypto markets are currently processing a cascade of news that fuel the bear case for price development," said Ulrik Lykke, executive director at crypto hedge fund ARK36.

Some crypto-watchers predicted more losses ahead, noting the fall below $40,000 represented a breach of a key technical barrier.

ARK CEO Wood, on the other hand, said in an interview with Bloomberg that she was still sticking to her $500,000 forecast for bitcoin.

Investors could also be exiting bitcoin for gold, analysts at JPMorgan (NYSE:JPM) said, citing data on open interest in CME bitcoin futures contracts.

That the crypto asset is tumbling at a time when inflation fears are rising undermines the case for investing in the asset class to hedge against inflation, analysts said.

Bitcoin plunges: A bust or a buy?
 

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Comments (26)
jemin An
jemin An May 20, 2021 2:58AM ET
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I really wants to split his face and throw punchs on his face!
andrew lee
andrew lee May 19, 2021 10:22PM ET
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recent events /tweets shows that it's not a real asset..it can be shaken too easily. just a tweak here and there. emperor is slowly but surely being exposed as the fraud it is.
Val Lange
Val Lange May 19, 2021 9:26PM ET
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Deep buy, buy ))) its a joke!
William Bailey
William Bailey May 19, 2021 8:48PM ET
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Go ahead , suckers, buy in !!! I lobe crypto because it burns off Fed cheap credit effect on stocks/assets!!!! Yeah baby !!
Daniel Lu
Daniel Lu May 19, 2021 7:21PM ET
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A bust to short, not buy? Next low is not the bottom of the high hill
Bipin Kochar
Bipin Kochar May 19, 2021 7:19PM ET
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Physical gold has very strong demand - India gold imports in Q1 surged to over $6 billion. Once COVID lockdowns end, jewellers will reopen and imports will zoom further
Bulent Ok
Bulent Ok May 19, 2021 6:20PM ET
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The crypto bloodbath that gripped investor attention was largely attributed to a regulatory crackdown in China. But this narrative “was quite deceiving as it was the People's Bank of China (PBOC) reiterating a 2017 policy rather than establishing any new ban,”
Don Thompson
Don Thompson May 19, 2021 6:20PM ET
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exactly same news for the 1226 time. China has always said stuff like this nothing new.
Don Thompson
Don Thompson May 19, 2021 6:20PM ET
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exactly same news for the 1226 time. China has always said stuff like this nothing new.
Leon Dame
Leon Dame May 19, 2021 6:20PM ET
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that's the point, these articles are always recycled to justify the Chinese ponzi scheme of crypto. Crypto exchanges are literally an unregulated Las Vegas. Just throw a few hundred at crypto and hope to get lucky, people viewing this as an investment are the ones getting liquidating or holding garbage assets. The old saying "you only make money once you sell...or lose etc." is a perfect example here. How many people actually took profit over the past 3 months? Probably very few which is why this dump occurred. To showcase how manipulated this all is, I can easily tell you that btc will pop over 40k overnight. Once Americans start buying high priced btc again tomorrow morning 40k to 42k, the dump to 36k will resume again. Around 9 to 10 am est.
Stalin Yesudas
Stalin Yesudas May 19, 2021 5:38PM ET
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What's done is done!! let's get back to business brothers!!
Mike Holden
Mike Holden May 19, 2021 5:31PM ET
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"Bitcoin plunges: A bust or a buy?" Might as well "buy" as Elon will more-than-likely do another 180, so get ahead of his curve and instrument.
Gus McCrae
Gus McCrae May 19, 2021 5:22PM ET
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bagholders running for the exits!!!
 
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