Virtual currencies are retreating so broadly and sharply, it’s testing the durability of the cryptocurrency boom.
The value of more than 7,000 tokens tracked by CoinGecko has shrunk more than $600 billion in the past week to $1.9 trillion. Bitcoin, the largest cryptocurrency, slid some 11 per cent Wednesday to break below $40,000 and is now about $25,000 off its record high set in April.
Multiple factors are at play, ranging from criticism of the environmental impact of Bitcoin’s energy usage by onetime proponent Elon Musk, to the risk of a regulatory squeeze on what some have called the Wild West of investing. Digital tokens have also delivered gains so fat that some traders may have been taking profits.
Early in April, the value of cryptocurrencies breached $2 trillion for the first time, doubling in about two months on optimism institutional investors were increasingly interested. The current weakness has erased over $600 billion.
Bitcoin tested its 200-day moving average, and its discount to the 120-day average is the biggest since last year, according to Mike McGlone, a commodity strategist at Bloomberg Intelligence in New York. He sees the Bitcoin price settling around the 2021 average of approximately $49,000.
Bitcoin was already dropping this month after Tesla ( ) CEO Elon Musk said he was wary of its environmental impact. But a new announcement from a trio of Chinese finance and banking watchdogs appears to have shocked cryptocurrency markets even more.
The agencies said Tuesday that financial institutions and payment companies should not participate in any transactions related to cryptocurrency, nor should they provide crypto-related services to their clients, CNN reported.
“Prices of cryptocurrency have skyrocketed and plummeted recently, and speculative trading has bounced back. This seriously harms the safety of people’s property and disturbs normal economic and financial orders,” said the statement from regulators supervised by the People’s Bank of China and the China Insurance and Banking Commission.
China’s chilly attitude toward cryptocurrency goes back years. While the country doesn’t completely ban cryptos, regulators in 2013 declared that bitcoin was not a real currency and forbade financial and payment institutions from transacting with it. At the time, they cited the risk that bitcoin could be used for money laundering, as well as the need to “maintain financial stability” and “protect the yuan’s status as a fiat currency.”
Members of the public can hold or trade cryptocurrencies, but major exchanges in mainland China have been shut down. Authorities in 2017 also banned initial coin offerings, a way for tech startups to raise money by issuing crypto tokens to the public.
The growing crackdown may also be in part to boost China’s state-backed digital yuan initiative, which authorities are working to implement so it can keep money flows under its strict oversight.
While the 2013 notice only mentioned bitcoin by name, some observers have taken it to apply to all cryptos, given Beijing’s distaste for the currencies. The state-owned China Times on Wednesday described the latest announcement as a “risk warning in nature.” While not a national law or regulation, it represents an “industry standard to some extent,” the outlet wrote, citing Zhu Youping, an official from the State Information Center, a policymaking think tank.
Still, it shows that China isn’t changing tack on crypto anytime soon — and that seemed to be enough to worry traders.
“The Chinese position on cryptocurrencies is clear from the beginning: trading and usage of cryptocurrencies are simply forbidden,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote, in a Wednesday research note. “Therefore, the news is nothing ‘new’, but given that crypto traders are too sensitive to negative news nowadays, it adds to the downside pressure on cryptocurrencies.”
Before the latest announcement from China, Tesla’s Musk had already sent crypto markets on a wild ride.
He flip-flopped last week on a plan to allow his electric carmaker to start accepting bitcoin as payment for its cars by suspending the program, citing sustainability concerns around the mining of bitcoin. The cryptocurrency fell 12% afterward. It kept dropping into the start of this week after Musk appeared to suggest that his automaker may have dumped its holdings of the digital currency, though he later clarified that it hadn’t.
Dogecoin, meanwhile, tumbled earlier this month after Musk — the coin’s most prominent supporter — joked about it on “Saturday Night Live.”
But the two cryptos are still astronomically higher than they were a year ago. Bitcoin is up 323% over the past year, according to Coinbase, while dogecoin has climbed 670%.