Cryptocurrencies are under siege. Atleast, that’s what you will feel when you look at the massive drop in their prices. While cryptos are much more volatile than traditional asset classes, the steep drop and pace of decline has taken everybody by surprise. Bitcoin fell to more than three-month lows on Wednesday, dropping to about $30,000 at one point. Ether, the main coin for the ethereum blockchain network, was also down sharply and broke below $2,000 at one point, a more than 40% drop in less than 24 hours. Binance Coin, the 3rd largest most valued crypto, has not been spared just as Tether, Cardano, Dogecoin, XRP, Polkadot, Internet Computer, Bitcoin Cash, Uniswap, Litecoin etc. Here’s a look at why cryptos are crashing.
Negative headlines
The pullback in bitcoin and other cryptocurrencies comes amid a stream of negative headlines. Tesla CEO Elon Musk expressed his concern over inefficient energy use for Bitcoin mining. Just recently, Tesla accepted Bitcoin as currency to buy and sell cars, resulting in the crypto’s increaing appeal and price rise. But last week’s head-spinning tweets about Bitcoin’s energy use have turned the positive sentiment upside down. Musk said Tesla would suspend car purchases using the token.
Then, there is China. A statement from the People’s Bank of China on Tuesday reiterating that digital tokens can’t be used as a form of payment have added to the crypto selloff. The Chinese warning hit cryptos, already infamous for extreme volatility.
Profit-taking on
The recent slide in cryptos is a reversal from the dramatic rise that started in the second half of last year. The price of bitcoin is still up more than 200 per cent since September, so profit-taking is on the cards.
The profit-booking actions were supported by, what observers say, a temporary reversal in the theory of broader acceptance for Bitcoin as a cryptocurrency.
This has affected Coinbase too. The crypto platform stock, which surged above $400 shortly after its first trade on April 14, is now trading at $210 levels. A new report from JPMorgan has said that based on futures contracts, institutional investors appeared to be moving away from bitcoin and back to gold.
Risk-off on
One common argument being heard by crypto enthusiasts is that the weakness is not isolated in crypto. This could well be a larger rotation trend by investors away from more speculative trades. For instance, tech and growth stocks, many of which outperformed the broader market dramatically during the pandemic, have started struggling.
And, Bitcoin and related assets are under increased scrutiny from regulators around the world. As cryptos increased, their market value and influence has grown in overall financial markets.
In the U.S., newly appointed SEC chair Gary Gensler talked about more consumer protection required in crypto markets.
