Bitcoin takes a hit after China introduces new crypto rules

Bitcoin has tumbled nearly 40% from a record high of $64,895 hit on April 14

Reuters

May 19, 2021

Bitcoin drops below $40,000, other coins also tumble.
China curbs come on heels of Elon Musk tweets.
Price fall undermines bitcoin as inflation hedge.

LONDON: Bitcoin prices took a hit as the cryptocurrency plummeted below the $40,000 mark on Wednesday to its lowest prices in three-and-a-half months after China announced fresh curbs on transactions involving digital currencies.

Bitcoin, the biggest and best-known cryptocurrency, had already been under pressure from a series of tweets from Tesla boss Elon Musk, but the news from China sent it as low as $38,514, for a 9% fall.

By 0855 GMT, it had recovered to $40,627, still down 5% on the session.

The cryptocurrency has tumbled nearly 40% from a record high of $64,895 hit on April 14. It is also heading for its first monthly decline since November 2018.

Bitcoin's decline whacked other crypto assets on Wednesday, with Ether, the coin linked to the ethereum blockchain network, falling 12% to $2,988, while meme-based dogecoin tumbled 18%, according to market tracker Coingecko.

Shares in the crypto exchange Coinbase slumped 4% in pre-market trading. Coinbase shares have lost 45% of their value from the peak hit on the day of their direct listing in April to Tuesday's close.

Cryptocurrency declines last week were sparked by Musk's reversal on Tesla accepting bitcoin as payment. His subsequent tweets caused further confusion over whether the carmaker had shed its holdings of the coin.

Selling was exacerbated by China's announcement on Tuesday banning financial institutions and payment companies from providing services related to cryptocurrency transactions. It also warned investors against speculative crypto trading.

"The crypto markets are currently processing a cascade of news that fuel the bear case for price development," said Ulrik Lykke, executive director at crypto hedge fund ARK36.

"News like this can get a lot of traction and easily stir market sentiment but they often prove of little significance in the long term. The crypto markets are extremely emotionally driven and their participants are prone to overreacting to events they perceive as negative."

However, some cryptowatchers predicted more losses ahead, noting the fall below $40,000 represented a breach of a key technical barrier which could set the stage for more selling in the short-term at least.

Inflation hedge

More importantly, investors may be shifting from bitcoin back to gold, analysts at JPMorgan said, citing positioning data compiled on basis of open interest in CME bitcoin futures contracts.

This shows "the steepest and more sustained liquidation" in bitcoin futures since last October, they told clients, adding: "the bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors."

The selloff in crypto assets at a time when inflation fears are in the ascendancy hurts the idea of the asset class acting as an inflation hedge.

Instead, more traditional hedges have been gaining ground, with gold up almost 6% so far this month.

The recent selloff in bitcoin and other digital currencies has taken market capitalisation of all cryptocurrencies back under $2 trillion, down from the recent $2.5 trillion record.