Why bitcoin just crashed – and cryptocurrency index is down 30pc this year

Bitcoin dropped to a six-month low on Saturday, extending a steep fall recorded in the previous session as the cryptocurrency market was swept up in a powerful shift by investors out of speculative assets.

The
price of the biggest digital token by market value fell 4.3 per cent in the European morning on Saturday to US$35,127, the lowest level since July 2021. Bitcoin has now lost almost a quarter of its value this year.

Other cryptocurrencies have also come under intense selling pressure, with an FT Wilshire index of the top five tokens excluding bitcoin down 30 per cent in the first month of 2022.

The cryptocurrency rout comes as investors have dumped shares in tech companies on expectations the US Federal Reserve will move to rein in loose pandemic monetary policy to combat inflation. Global stock markets posted their biggest declines in more than a year this week, with the fast-growing companies that powered the rally from the depths of the coronavirus crisis enduring intense falls.

Investors now forecast the Fed, the world’s most influential central bank, will raise interest rates three to four times this year, something that has sent bond yields surging. Higher yields on low-risk assets like US government bonds make the potential returns that can be earned through speculative investments like cryptocurrencies look less appealing, analysts say.

Andrew Sullivan, managing director at Outset Global in Hong Kong, said Asia was seeing “huge volumes going through in a number of markets as investors move to cash” on Friday, as technology shares in the region fell.

The sharp sell-off in digital assets also came a day after the Russian central bank announced on Thursday draft proposals seeking to ban all cryptocurrency trading and mining. The proposed regulations would also block cryptocurrency investment by banks and forbid any exchange of cryptocurrency for traditional currencies in Russia, one of the world’s largest centres for crypto mining.

The central bank said in its 36-page report that the rapidly rising value of cryptocurrencies “is defined primarily by speculative demand for future growth, which creates bubbles”, adding they “also have aspects of financial pyramids, because their price growth is largely supported by demand from new entrants to the market”.

The announcement initially had little impact on bitcoin, which rose as much as 3.7 per cent against the dollar on Thursday. But by Friday afternoon in Asia the cryptocurrency had dropped more than 10 per cent from the previous day’s high to hit its lowest level since August.

“The Russian regulators have been frustrated [with the cryptocurrency industry] for several years and none of their warnings have been heeded,” said Vince Turcotte, Asia-Pacific sales director at Eventus Systems.

He added that while the Russian proposal was “relatively harsher”, it was only the latest in a slew of announcements on cryptocurrencies by regulators across the globe focused mainly on protecting retail investors.

Turcotte likened the situation in Russia to that of China before Beijing began a more forceful crackdown on the industry. “Nobody listened to [Chinese officials] until they actually brought the hammer down,” he said. Last year, China declared that all crypto activities were illegal.

© Financial Times