Bitcoin gyrates on fears of regulatory crackdown

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Cryptocurrency markets swung in chaotic trading and related stocks were hit after Chinese regulators signalled a crackdown on the use of digital coins, which have soared in price this year.

Bitcoin tumbled as much as 30 per cent to a low of $30,101, before clawing back its losses to less than 8 per cent.

Other digital coins were also hit by heavy selling, with ethereum, one of the best-performing cryptocurrencies in the past month, losing a quarter of its value before moderating to losses a little over 20 per cent. More than $8.6bn of positions have been liquidated over the past 24 hours, according to data from bybt.com, a cryptocurrency data provider.

The sharp moves came after the People’s Bank of China warned financial institutions about accepting cryptocurrencies as payment or offering related services and products, amplifying investor concerns that regulators could tighten oversight of the freewheeling asset class.

Elon Musk, Tesla’s chief executive and an outspoken cryptocurrency enthusiast, last week reversed course on accepting bitcoin as payment for the company’s electric cars on environmental grounds, also sharpening worries about the long-term future of the asset class.

In a tweet on Wednesday, Musk indicated that Tesla was holding bitcoin for the long term and would not be selling its position.

Cathie Wood, founder of Ark Invest, a fund manager that has invested heavily in cryptocurrency-related companies, also reiterated her support for bitcoin. “We go through soul-searching times like this and scrape the models and, yes, our conviction is just as high,” she told Bloomberg Television.

Market conditions were highly volatile, with bitcoin’s price swinging in often wide ranges. Binance and Coinbase, two of the best-known cryptocurrency exchanges, both experienced technical problems with their exchanges as users tried to sell their holdings.

Other cryptocurrencies also tumbled, including the “joke” dogecoin, which fell by as much as 40 per cent.

Line chart of $ per coin showing Bitcoin tumbles after China warns on cryptocurrencies

US securities reliant on cryptocurrency trading and prices also slumped in early trading, before recovering. Coinbase shares dropped as much as 12 per cent to a record low before recovering to trade down 7 per cent, and MicroStrategy, the software company turned bitcoin investor, fell 15 per cent before rallying back to end the day almost 8 per cent lower.

Marathon Digital Holdings, the cryptocurrency miner, finished 6 per cent lower. Galaxy Digital Holdings, the investment company of the entrepreneur Michael Novogratz, fell 7 per cent.

Virtual currency “is not a real currency” and “should not and cannot be used as currency in the market”, the PBoC said in a statement late on Tuesday. It referred to a recent surge in prices as “speculation”.

The development reflected China’s campaign to limit institutional activity in cryptocurrencies as it prepares to launch its own digital currency. Other markets such as the US have remained comparatively open to institutional involvement.

“Part of it is they have their own digital renminbi, part is the lack of control in terms of cash outflows and part of it is trying to make sure people don’t get scammed,” said Paul Haswell, a partner at the law firm Pinsent Masons in Hong Kong, of China’s crackdown. 

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China’s pressure on cryptocurrencies gained momentum in 2017 when it closed the country’s bitcoin exchanges, which had previously accounted for the majority of global trading.

The government’s plans for a digital renminbi, which would provide the central bank with a record of all currency transactions in real time, could create a rival cashless payment mechanism to compete with vast online fintech platforms from Ant Group and Tencent.

In the US, regulators have made it easier for retail investors to buy cryptocurrencies and permitted the listing of crypto exchanges on public markets.

Large US financial institutions, such as Goldman Sachs and JPMorgan Chase, are exploring offering investments in digital currencies to wealth management clients. But financial watchdogs have pointed to the need for greater consumer protections.

In its latest financial stability review, the European Central Bank said bitcoin’s price volatility made it risky, as well as flagging its “exorbitant carbon footprint and potential use for illicit purposes”. Yet financial stability risks to euro area institutions were limited as they had little exposure, it added.

The price of bitcoin has soared 300 per cent over the past 12 months, despite its recent sell-off. The ECB noted that the surge in bitcoin prices had eclipsed previous financial bubbles such as “tulip mania” and the South Sea Bubble in the 17th and 18th centuries.

“I would not be surprised to see other regulators and policymakers do the same [as the Chinese restrictions] over the coming weeks as they warn investors over the risks of speculative trading or crypto market volatility,” said Henri Arslanian, global head of crypto at the consulting company PwC.

“The reality is that we are seeing the continuous entry of institutional players and institutional investors in this space and that is unlikely to slow down any time soon.”

Additional reporting by Wang Xueqiao in Shanghai

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