Bitcoin plunges: A bust or a buy?

NEW YORK/LONDON • Cryptocurrencies that seemed to be defying gravity just weeks ago have landed back on earth with a bump, 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 per cent and 45 per cent respectively on Wednesday, but significantly pared losses after two of their biggest backers - Tesla 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 US$1 trillion (S$1.3 trillion) was wiped off the market capitalisation of the crypto sector. In early afternoon trading, its market cap was US$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 Plumb Balanced Fund portfolio manager Tom Plumb.

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

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

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 Mr Musk. Cryptocurrency price falls last week were sparked by his 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 the currency.

Amid Wednesday's crypto sell-off, Mr Musk tweeted a "diamond hands" emoji, used in social media to signal a position is worth holding on to.

"His tweet definitely helped the recovery," said Mr Mike Venuto, founder and chief investment officer at Toroso Investments, which oversees US$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 per cent from a record high of US$64,895 on April 14. On Wednesday, it hit a low of US$30,066. Tesla shares fell 2.5 per cent.

"Bitcoin's sharp price drop should come as no shock to the market," said Mr Gavin Smith, chief executive 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 per cent at US$2,620. Meme-based dogecoin also tumbled, losing nearly 26 per cent, at 35 US 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 fell 5.9 per cent 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 crypto hedge fund ARK36 executive director Ulrik Lykke.

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

However, Ark Invest's Ms Wood told Bloomberg in an interview that she was still sticking to her US$500,000 forecast for bitcoin.

Investors could also be exiting bitcoin for gold, analysts at JPMorgan 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.

REUTERS