A crypto crash wiped out $1 trillion this week. Here’s what happened
New York (CNN Business) Wild, stomach-churning moments are part of the experience when you buy a ticket to the crypto circus. But the past week’s volatility was enough to make some of the crypto faithful wonder whether they’ve been bamboozled.
On Wednesday, a broad crypto crash wiped out about $1 trillion in market value — a staggering drop from $2.5 trillion just a week ago. Bitcoin, which accounts for more than 40% of the global crypto market, nosedived 30% to $30,000 on Wednesday , its lowest point since January.
By Friday, bitcoin had rebounded slightly, to around $37,000 — bruised by continued regulatory concerns, and far off its all time high above $64,000 that it hit a month ago.
Volatility is baked into the nascent cryptocurrency market , but the digital assets' explosive growth in the past year has attracted hordes of amateur and professional investors looking for a quick profit. Many of them ride an upswing and get out, or panic sell when things turn sour, exacerbating gains or losses.
This week, a combination of factors, including government warnings about increased regulation and tweets from influential market mover Elon Musk, added fuel to an already jittery market.
What happened?
The crypto market had been especially shaky for about a week before the crash on Wednesday.
On May 12, bitcoin fell 12% after Elon Musk walked back Tesla’s commitment to accept bitcoin as payment, citing concerns over the crytocurrency’s massive carbon footprint. Musk added to investor anxiety last weekend with a pair of seemingly contradictory tweets about bitcoin that left investors scratching their heads.
Then the big crash came Wednesday, after Chinese officials signaled a crackdown on crypto use in the country. The central bank issued a warning to Chinese financial institutions and businesses not to accept digital currencies as payment or offer services using them.
The threat of increased regulation triggered a panic, and bitcoin plunged before rebounding slightly and leveling off. Other cryptocurrencies also tanked: Ethereum fell more than 40%, while dogecoin and binance lost around 30%.
By Thursday, bitcoin had recouped some losses and was back above $41,000. But a Friday statement from Chinese officials reiterating the need to crack down on cryptos beat bitcoin back down. It was trading around $37,000 on Friday afternoon. Other cryptos were also in the red.
Regulatory concerns
China has long had limits around crypto trading within its borders. Officials declared in 2013 that bitcoin was not a real currency and banned financial and payment institutions from using it. Individuals can hold or trade cryptocurrencies, but major exchanges in mainland China have been shut down.
On the surface, this week’s statements simply underscored China’s suspicion of cryptocurrencies generally. But they sent a clear signal that Beijing is not loosening its grip on the market anytime soon. Authorities are also launching a state-backed digital yuan that would keep money flows under strict oversight.
And it’s not just China. On Thursday, Federal Reserve Chairman Jerome Powell warned about potential risks cryptocurrencies pose to the financial system. Powell also said the central bank would publish a paper this summer that will explore the implications of the US government developing a digital currency of its own.
A potential central bank digital currency “could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks,” Powell said
The Treasury Department is also turning its attention to the crypto space. On Thursday officials said any transfer of digital currency valued at $10,000 or more must be reported to the Internal Revenue Service.
“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the Treasury said in a statement. “Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade, especially in the presence of a broad-based financial account reporting regime.”
Bitcoin had been up nearly 6% Thursday but pared its gains after the statements from US officials, according to Bloomberg
The future of cryptos
The week’s wild swings were a test for cryptocurrency fans. True believers tend to take the long view: At the start of 2020, bitcoin was trading around $7,000 a coin, which means it’s still up more than 400% in that time, even after crashing this week.
“We all tend to focus on day-by-day, week-by-week,” said William Quigley , managing director at crypto-focused investment fund on Wednesday. “But that’s not how most people buy cryptocurrencies, or even stocks.
Is it a bubble? Probably, according to ethereum co-creator Vitalik Buterin. In an interview with CNN Business this week , Buterin said he wasn’t surprised by the crash, because he’s seen it all before.
“We’ve had at least three of these big crypto bubbles so far,” he said. “And often enough, the reason the bubbles end up stopping is because some event happens that just makes it clear that the technology isn’t there yet.”
Bitcoin ends week in freefall as China warns of crypto crackdown
The largest digital currency fell as much as 10 percent in late Friday trading, reaching as low as $35,636, with other tokens also posting double-digit losses.
Bitcoin is heading into the weekend in freefall again after a fresh warning from Chinese officials over cracking down on cryptocurrencies.
The largest digital currency fell as much as 10% in late Friday trading to as low as $35,636, and peer tokens also posted double-digit losses. The coin almost hit $30,000 earlier in the week, after ending May 14 at $49,100.
The latest blow came when China’s State Council reiterated its call to curtail Bitcoin mining and trading. The crypto market was already rattled earlier in the week by forced selling and possible U.S. tax consequences.
Friday’s selloff hit Bitcoin believers still fuming after onetime proponent Elon Musk did an about-face and criticized the token for its energy usage. Bitcoin is down about 25% since last Friday, though it’s up from a Wednesday plunge to as low as $30,000. Other coins have slumped too — Ether is down about 38% over the past seven sessions.
The sour stretch started with Musk suspending acceptance of Bitcoin payments at Tesla Inc. and trading barbs with boosters of the cryptocurrency on Twitter. China’s central bank added to the downdraft Tuesday with a statement warning against using virtual currencies. On Thursday, it emerged the U.S. may require crypto transactions of $10,000 or more to be reported to tax authorities.
China has long expressed displeasure with the anonymity provided by Bitcoin and other crypto tokens, and warned earlier that financial institutions weren’t allowed to accept it for payment. The country is home to a large concentration of the world’s crypto miners, who require massive amounts of power and thus run afoul of the nation’s efforts to curb greenhouse-gas emissions.
“The new guidance issued from the regulatory agencies — they’re taking it more seriously, they want more enforcement,” Bobby Lee, founder and chief executive officer of crypto storage provider Ballet, said in an interview Friday. “There’s talk about going after miners. The question is, can they catch all the miners.”
China’s moves this week highlight the country’s continued desire to seek control over the notoriously volatile asset class. It’s something China would rather see regulated by the People’s Bank of China, market-watchers say.
“It’s not really the mining issue that is the problem,” said Matt Maley, chief market strategist for Miller Tabak + Co. “They say they’re doing this as part of an effort to control risk-taking in their markets, but it’s really a signal that China is not going to be a big market for cryptos unless it’s a PBOC-controlled one.”
In the meantime, volatility in Bitcoin is likely to stay elevated. The selloff Friday once again pushed Bitcoin below its average price over the past 200 days, which to some chartists and technical analysts suggests it could trend lower still to around $30,000, where it found support earlier this week.
This week’s swings have led to huge liquidations by leveraged investors and damaged the narrative that cryptocurrencies will become more stable as the sector matures. Musk’s actions showed how just a few tweets can still upend the entire market. But even moreso, the past few days have renewed the regulatory threat on the crypto market.
“Investors are underestimating the regulatory risk of crypto as governments defend their lucrative monopolies over currency,” said Jay Hatfield, chief executive officer of Infrastructure Capital Advisors in New York. In the U.S., the possible imposition of transaction reporting requirements could be the “tip of the iceberg” of potential Treasury rules on virtual currencies, he said.
As far as regulations in China go, it may be a game of wait and see.
“You must always proceed cautiously with China — never get too bullish or bearish,” said David Tawil, president of ProChain Capital. “We’ll have to see what the regulation brings. It’s one thing to say, it’s another to do.”
Retail investors learn to love the crypto rollercoaster
NEW YORK: When Brjánn Bettencourt rolled out of bed on Wednesday morning to find the assets in his cryptocurrency portfolio slammed in their biggest selloff in years, he knew exactly what to do: buy more.“Investing in crypto is not for the faint of heart,” said Bettencourt, a 32-year-old photographer in Toronto who has owned bitcoin and ether over the last year-and-a-half to complement his stock portfolio. “I’m looking at this as a serious long-term investment.“This week, cryptocurrencies were buffeted by factors ranging from critical tweets by Tesla Inc CEO Elon Musk to governmental controls in China. The price of bitcoin, the world’s biggest cryptocurrency, tumbled as much as 30% before retracing some losses. It is down some 40% from its highs of the year.Leveraged positions in bitcoin and ether futures fell sharply last week, said Vanda Research, which tracks retail trades. This indicates that some retail traders probably have folded their tents."(The) crypto bubble has started to unravel and data from different exchanges suggest that retail investors are capitulating,” Vanda researchers said.But other retail investors have been happy to ride the turbulence out or trade around it. “In crypto talk, when stuff like this happens, people say it shakes out all of the weak hands and the people … who maybe bought because they saw it on the news,” said Ethan Lou, author of “Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West,” due this autumn.As retail investors piled into cryptocurrencies, bitcoin surged around 345% in the last year, ether soared 1,219% and dogecoin skyrocketed 15,480%, according to Coinbase data.Crypto-exchange Coinbase said its more than 56 million users accounted for $335 billion in trading volume in the first quarter: $120 billion retail and $215 billion institutional. That compares to $30 billion in total a year earlier, of which $12 billion was retail, the company said.Retail interest this year also scooped up shares of “meme stocks” such as GameStop, pushing prices through the roof and punishing hedge funds that had sold the shares short.Some retail investors have embraced the wild price swings in hopes of catching some of the next big rally. Users on Reddit’s popular WallStreetBets forum have popularized the term “diamond hands”as shorthand for their willingness to hold an asset through thick and thin.Increased mainstream adoption has drawn the attention of regulators. The U.S. Treasury Department on Thursday called for new rules that would require large cryptocurrency transfers to be reported to the Internal Revenue Service . The Federal Reserve said cryptocurrencies pose risks to financial stability. On Friday, China said it will crack down on bitcoin mining and trading activities.Cryptocurrencies have been notoriously volatile throughout their history. Bitcoin plunged 94% in 2011, and dropped 82% between late 2017 and the end of 2018, causing many investors to back away.Lily Francus, however, has tried to take advantage of the big swings. The 25-year-old, who lives in San Diego and works as a quantitative researcher at a crypto hedge fund, first traded cryptocurrencies in 2017, but got out before the price crashed. Then last month she put about 1% of her net worth into various cryptocurrencies, joining a rally she saw as partly fueled by social media hype.She liquidated her ether and cut her bitcoin position when Musk hosted Saturday Night Live on May 8. She later bought 40% of her ether position back at a lower price.The Tesla CEO has flip-flopped on whether the electric carmaker would accept bitcoin as a payment, and has often moved the price of dogecoin with his tweets.“When you see … people diving into the markets for fear of missing out, that’s usually a good time to get out,” Francus said.Doug Liantonio, 31, of Deerfield Beach, Florida, said he owns dogecoin and ethereum classic. With dogecoin prices down 50% from their highs, he is waiting for another rally before selling.“I don’t think I will wait for Elon’s PR stunt for his rocket, that would be too late,” he said. Musk recently announced that his company SpaceX will launch a rocket to the moon next year, funded with Dogecoin.For Bettencourt, the photographer, the ups and downs of crypto are part of its appeal.Investing in cryptocurrencies “feels like that scary rollercoaster,” he said. “You’re riding it up and riding it down and feeling every twist and turn, which to me is exciting and fun.”