Bitcoin tanks after Elon Musk hints prices are excessive; Janet Yellen sounds warning

Bitcoin was down about 5.6 per cent after plunging as much as 17 per cent earlier on Feb 22.
Bitcoin was down about 5.6 per cent after plunging as much as 17 per cent earlier on Feb 22.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Elon Musk's embrace of bitcoin earlier this month rocketed the cryptocurrency almost 50 per cent higher to more than US$58,000 (S$76,600). His cold shoulder this weekend whipsawed the largest digital asset.

Bitcoin dropped as much as 6 per cent in Asia trade on Tuesday (Feb 23) and was trading around US$52,000. On Monday, it plunged at one point as much as 17 per cent to below US$50,000, giving up more than US$8,000 in a matter of hours after the world's richest man tweeted his concern that the price had risen too high too quickly.

"Elon and his fleet have incredible power over market prices," said Mati Greenspan, founder of Quantum Economics, comparing Mr Musk's influence over the digital asset's price moves to Warren Buffett.

Long-time bitcoin skeptic and now Treasury Secretary Janet Yellen also offered a stark warning, saying at a New York Times conference on Monday that the token is an "extremely inefficient way of conducting transactions."

Even other billionaires are weighing in on Mr Musk's comments. Microsoft co-founder Bill Gates said in an interview with Bloomberg Television's Emily Chang that he isn't a fan of bitcoin, either for environmental reasons - it uses a lot of energy - or for individual investors not named Elon Musk.

"Elon has tons of money and he's very sophisticated so I don't worry that his bitcoin will sort of randomly go up or down," Mr Gates said. "I do think people get bought into these manias who may not have as much money to spare, so I'm not bullish on bitcoin, and my general thought would be that if you have less money than Elon you should probably watch out."

It's widely believed that volatile weekend swings are driven by individuals trading the cryptocurrency at home. So it's also possible that prices fell on Monday as institutional crypto traders, who follow normal business hours, responded to Musk's Saturday tweet that bitcoin and Ether prices "seem high."

The world's largest cryptocurrency had been on a tear this month, propelled by purchases from Mr Musk's Tesla and institutional investors who say bitcoin is an attractive alternative to gold and the dollar. Skeptics have warned that the rally is a bubble born of massive government stimulus and excess liquidity from central banks.

In February alone, bitcoin was up more than 60 per cent, prompting commentary that the run-up is excessive. The digital token hit a new all-time high on Sunday and came close to surpassing US$59,000. 

So-called altcoins fell in tandem. Ether, the second largest cryptocurrency by market value, plunged as much as 19 per cent before paring losses to about 13 per cent on Monday. Ether extended losses on Tuesday in Asian trading, dropping more than 5 per cent. It last bought US$1,707, down almost 17 per cent from last week's record peak. 

The Bloomberg Galaxy Crypto Index, which measures the performance of the largest digital assets, fell as much as 18 per cent on Monday.

Meanwhile, JPMorgan Chase & Co strategists have warned about bitcoin's declining liquidity. Strategist Nikolaos Panigirtzoglou wrote in a note on Friday that liquidity for the digital coin was lower than that for the S&P 500 Index and gold, meaning "even small flows can have a large price impact," he wrote.

"It should go without saying that new investors to bitcoin should be prepared for major volatility and for prices to drop suddenly and as sharply as they have risen," according to Neil Wilson, chief analyst at Markets.com.

On a personal note, the bitcoin plunge on Monday wiped US$15.2 billion from Mr Musk's net worth after Tesla shares slid 8.6 per cent. 

Tesla’s biggest decline since September was fueled in part by Mr Musk’s bitcoin comments over the weekend . Two weeks ago Tesla announced it added US$1.5 billion in bitcoin to its balance sheet.

Mr Musk also tweeted earlier Monday that the company’s Model Y Standard Range SUV would still be available “off the menu,” backing up reports from electric vehicle news site Electrek that the model had been removed from its online configurator.

Mr Musk dropped to second on the Bloomberg Billionaires Index of the world’s 500 richest people with a net worth of US$183.4 billion - down from a peak of US$210 billion in January. Amazon.com founder Jeff Bezos reclaimed the top spot even as his fortune fell by US$3.7 billion to US$186.3 billion on Monday.

The two billionaires have been swapping places since January as the value of Tesla fluctuated. The stock surged as much as 25 per cent to start 2021 before wiping off almost all of this year’s gain. Mr Musk briefly overtook Mr Bezos after his rocket company SpaceX raised US$850 million earlier this month, valuing the company at US$74 billion, a 60 per cent jump from August.