Cryptocurrencies nurse wounds after blows from China, forced selling, US tax clampdown, Musk

Bitcoin fluctuated at around US$40,000 in Asian trade, up from Wednesday's plunge towards US$30,000. PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - The cryptocurrency market nursed its wounds on Friday after a week of pain triggered by a Chinese regulatory warning shot, forced selling and a possible United States tax clampdown.

If that was not enough, bitcoin believers are still fuming after one-time proponent Elon Musk did an about-face and criticised the token for its energy usage.

Bitcoin fluctuated at around US$40,000 in Asian trade, down about 9 per cent on the week though up from a Wednesday plunge towards US$30,000. Other coins have slumped too, such as ether's 17 per cent weekly nosedive.

The sour stretch for digital tokens started with Tesla's billionaire founder Musk suspending acceptance of bitcoin payments and trading barbs with boosters of the cryptocurrency on Twitter.

China's central bank added to the downdraught on Tuesday after carrying a statement warning against using virtual currencies.

On Thursday, it emerged the US may require crypto transactions of US$10,000 or more to be reported to the tax authorities.

"Volatility of bitcoin is to stay elevated," said Mr Ben Emons, managing director of global macro strategy at Medley Global Advisers in New York. Leverage that unwound in Wednesday's tumble is already being replaced, he added in a note.

This week's swings led to huge liquidations by leveraged investors and damaged the narrative that cryptocurrencies will become more stable as the sector matures. Mr Musk's actions showed how a few tweets can still upend the entire market.

Still, over a longer time horizon tokens like bitcoin and ether are sitting on big gains. Over the past year, bitcoin is up more than 300 per cent and ether 1,200 per cent.

One takeaway from the past few days is a reiteration of the regulatory threat to the crypto market.

"Investors are underestimating the regulatory risk of crypto as governments defend their lucrative monopolies over currency," said Mr Jay Hatfield, chief executive of Infrastructure Capital Advisers in New York.

The possible imposition of transaction reporting requirements could be the "tip of the iceberg" of potential Treasury rules on virtual currencies, he said.

The Bloomberg Galaxy Crypto Index is poised for a weekly tumble of more than 25 per cent, the most since the market turmoil that accompanied the onset of the Covid-19 pandemic last year.

Despite downside risks and this week's volatility - which saw bitcoin slide about 31 per cent and jump roughly the same percentage on Wednesday - crypto bulls are undaunted.

They are sticking to the narrative that bitcoin offers a modern-day portfolio hedge and store of value, akin to digital bullion, and that blockchain-based financial services - so-called decentralised finance - are expanding.

"The institutional investors getting exposure to digital gold aren't going away any time soon," Mr Paolo Ardoino, chief technology officer of crypto exchange Bitfinex, wrote in a note on Thursday.

"Decentralised finance will continue to grow. Developers will continue to build."

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