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This article is more than 4 month old.

Bitcoin collapse explained: Why has the cryptocurrency nosedived?

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Bitcoin is still over 200 percent up from Septmeber '20 and 27 percent so far this year. It had touched an all-time high of $63,000 in the second week of April and intra-day volatility has spiked to near 300 percent this week. So, what went wrong in April leading to May? Let's find out.

Bitcoin collapse explained: Why has the cryptocurrency nosedived?
Bitcoin has been volatile with a downward bias since Elon Musk withdrew from endorsing the cryptocurrency. Its price nosedived 30 percent on Wednesday dropping to $30,000 at one point, while slipping to more than three-month lows.
At one point on Wednesday, nearly $1 trillion was wiped off the market capitalization of the entire crypto market, according to data from CoinGecko. It would have continued the rollercoaster ride if not for some proponents coming forward to propel it on a rebound.
In the last 24 hours, Bitcoin touched an intraday high of nearly $40,000 and a low of $30,000, even from bitcoin standards, this was volatile. At the time of writing, it was trading at $39,588.
Bitcoin is still over 200 percent up from September '20 and 27 percent so far this year. It had touched an all-time high of $63,000 in the second week of April and intra-day volatility has spiked to near 300 percent this week. So, what went wrong in April leading to May? Let's find out.
How did bitcoin take such bad bruises?
Bitcoin's stunning bull rally was a product of buying sparked by institutions, hedge fund managers, and banks. And now that institutional support has retreated.
Earlier this year, Elon Musk, Tesla chief, announced that Tesla has added bitcoin worth more than a billion dollars to its balance sheet. Following this, a lot of payment firms added crypto features, even Wall Street banks began offering cryptocurrencies to their clients.
However, last week Tesla reversed its decision to accept payments in bitcoin, citing environmental issues.
Bitcoin's mining consumes more energy than some smaller nations like Malaysia consumes in a year. Even worse, they are mined using fossil fuels, so the more the bitcoin booms, the more energy it consumes. Read more about how much energy bitcoin consumes.
Musk did not sell Tesla's bitcoin holdings though, a fact that he reiterated on Wednesday with the show of diamond hands.
Further, a report from JPMorgan suggested that institutional investors appear to be moving away from bitcoin -- a fact that had fueled bitcoin's surge when institutional interest in the digital currency became apparent.
In a report early Wednesday, JPMorgan said institutional investors are dumping bitcoin for gold -- the traditional store of value. Bitcoin has aspirations to replace the traditional yellow metal as a hedge against inflation.
While some investors saw missed opportunities in the slide, others saw the rout as an opportunity to buy cheap.
Is the money flowing from bitcoin to altcoins?
Glassnode, a bitcoin data provider, had earlier indicated that a portion of bitcoin's capital is rotating towards Ether and Dogecoin.
While Bitcoin's market cap plunged from over $2 trillion to $700 billion, altcoins such as Ether and Dogecoin are enjoying a higher market cap.
Ether has soared over four times this year, and its market cap has risen to $380 billion. The market cap of Dogecoin has also surged to $60 billion in the past month, making it the fifth-largest cryptocurrency. Click here to know how Bitcoin's bruises did not stop altcoins from surging.
While Ether has gained popularity and momentum because of underlying fundamental reasons, the same cannot be said for Dogecoin and Shiba Inu.
Is it a risk-off trade?
Cryptocurrency weakness is not an isolated case though, the trends seem to show that investors are moving away from speculative assets.
Investor sentiment is particularly weighed currently as global stocks are slipping, with concerns over an uptick in the US inflation haunting investors.
Tech and growth stocks that rose dramatically at the height of the pandemic last year have also seen a rollback. Nasdaq composite -- Wall Street's tech-heavy index -- has fallen nearly 5 percent from April highs.
Cathie Wood's Ark Innovation ETF is over 30 percent down from its February highs.
Per a CNBC report, the delayed deadline for tax payments could also have caused selling pressure as investors look for cash to pay off capital gains tax.
The plunge forced some to close leveraged positions in crypto derivatives, causing prices to fall further and knocked digital assets down into a lower trading range, traders said.
Weighing regulatory concerns
As cryptocurrency bull run blinded markets, regulatory scrutiny increased too. Analysts believe it could be a factor that could trigger another "crypto winter".
While many analysts slated the crypto explosion of the past few months as unsustainable, the trigger for this week's shake-out was China.
Earlier this week, China banned financial and payment companies from providing services related to cryptocurrency transactions. It also warned investors against speculative crypto trading.
While Beijing has taken steps before to block access domestically to cryptocurrency exchanges, its latest directive was broader. It is, however, worth noting that China is developing its own state-controlled cryptocurrency.
Besides, the new head of the US Securities and Exchange Commission (SEC) said more investor protection is required in the cryptocurrency market. He said, he views bitcoin as a 'speculative' asset and that SEC should be 'technology-neutral' when it comes to market-based innovations.
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