Bitcoin steadies after biggest slump since March’s meltdown

Bitcoin and other digital coins steadied Friday after posting some of the biggest declines since the onset of the pandemic, a selloff that stoked fresh questions about this year’s boom in cryptocurrencies.

Bitcoin climbed above $17 400, following a slide of as much as 14% to $16 227 on Thursday. Fears over tighter crypto regulations and profit-taking after a frenetic rally were among the reasons cited for the tumble.

“After big rallies in shares and various other assets, they are all vulnerable to a bit of a pause,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “But Bitcoin more than most, as it surged higher far more and had become far more frothy with speculative interest.”

The slump pared Bitcoin’s rally this year to about 140%, a climb that’s split opinion. Crypto believers tout a broadening investor base and the search for a hedge against dollar weakness amid loose monetary policy as reasons for a durable boom. Set against that is a history of big swings, including the run up to a record three years ago that was followed by a spectacular bust.

Proponents of digital assets say the current focus on cryptocurrencies compared with three years ago is different because of growing institutional interest, for instance from the likes of Fidelity Investments and JPMorgan Chase & Co.

Just this week, Van Eck Associates Corp. launched a Bitcoin exchange-traded note on the Deutsche Boerse Xetra exchange. In October, PayPal Holdings said it would allow customers access to cryptocurrencies.

FOMO

Others see signs of retail investors piling in to chase momentum for fast gains, storing up an inevitable reckoning. The rout in Bitcoin began just hours after it rose to within $7 of its record high of $19 511 set in December 2017.

Concern about potential U.S. crypto rules help explain Thursday’s price drop across most major digital assets, said Ryan Rabaglia, global head of trading at OSL brokerage in Hong Kong.

“It’s also not unusual to see a short-term pullback following periods of significant, accelerated gains as traders look to take profits before resetting once volatility subsides,” he said. “Once the dust settles, we’re back to business as usual with all medium to long-term bullish indicators still in play.”

Bitcoin rose 2.3% as of 10:36 a.m. Friday in Tokyo, while Ether advanced 3.2% and XRP — which slumped about 20% Thursday — climbed 12.5%, according to prices compiled by Bloomberg.

Crypto ‘whales’

A few large holders often referred to as whales own most Bitcoin. About 2% of the anonymous ownership accounts that can be tracked on the cryptocurrency’s blockchain control 95% of the digital asset, according to researcher Flipside Crypto. That structure points to the risk of big price swings if major investors offload some of their stakes.

“Bitcoin may be a victim of its own success,” said Michael McCarthy, chief market strategist at CMC Markets Plc in Sydney. “Traders suggested several large holders moved to lock in gains as the cryptocurrency reached for all-time highs.”

AMP Capital’s Oliver said the depth of the recent plunge shows Bitcoin is “hardly a secure store of value,” adding it may be vulnerable if Covid-19 vaccines lead to a sharp global recovery next year.

“Money printing and the debasement of paper currencies that Bitcoin enthusiasts are seeking to protect against may start to fade as an issue,” Oliver said.

© 2020 Bloomberg