Bitcoin price bounces after crypto crash shocks market
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3 min read . Updated: 20 May 2021, 06:30 PM IST - Dogecoin, ether also recover lost ground after Wednesday’s frenzied selloff
The prices of bitcoin, ether and other cryptocurrencies found some respite Thursday, following a frenzied selloff that delivered a sharp blow to investors swept up in a euphoric rally since late last year.
Bitcoin recovered 2% to $39,196 on Thursday. It had dropped more than 11% by 5 p.m. ET on Wednesday, after earlier plunging almost 30%. Dogecoin, the cryptocurrency that began as a joke, rose 1.8% after dropping 27% the previous day, while ether was up 1.9% after falling 26%.
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This week’s crypto crash has helped erase almost 40% from bitcoin’s price from a peak of almost $65,000 in mid April. Some are worried that the worst is far from over. The rapid drop has forced many investors to unwind bets made with borrowed money, adding to the pressure on prices for a swath of cryptocurrencies.
The highly volatile digital coins had been in retreat for weeks before Wednesday’s meltdown, which was sparked by regulatory restrictions in China. But investors pointed to the build up of highly unstable borrowing that has shackled together the prices of different digital assets.
Worries about the amount of money being borrowed against bitcoin to invest in other crypto assets led Ruffer LLP to sell its bitcoin holdings in April, according to Matt Smith, manager of the London-based firm’s Total Return Fund.
“At the peak, we thought there was a lot of bad behavior going on," Mr. Smith said.
A raft of specialist lending platforms have sprung up where investors can pledge their bitcoins for a high fee, but also use them as collateral to invest borrowed funds in other crypto assets. This activity can generate yields of up to 20%, which ought to tell investors something about the level of risk involved, Mr. Smith said.
Doing this also creates a direct link between the values of different coins through leverage. “Then selling begets more selling, and you can see that" in Wednesday’s crash, he said.
Some platforms are also allowing people to put up nonfungible tokens up for loans. So-called NFTs are used to prove ownership of digital assets, such as image files, videos or music.
Ruffer still believes bitcoin has genuine potential as a store of value over the long term, and it poses a threat to the traditional role of gold in portfolios by becoming the millennials’ digital gold, Mr. Smith said.
The firm was fortunate in its timing, making hundreds of millions of dollars after it allocated 2% of its assets to bitcoin last November. It had more than $30 billion under management at the end of April. Ruffer twice sold chunks of its bitcoin holdings as the price shot higher to cut its allocation back to 2%. It eventually decided to sell completely in April because the price had risen so much and Mr. Smith decided other assets provided better potential returns.
Some investors took comfort that Wednesday’s fall didn’t spill over into forced selling of stocks and other risky assets. Concerns had been growing that this could happen because more institutional investors were buying bitcoin for investment or their corporate treasuries.
Heightened institutional adoption—spurred by investments from hedge-fund manager Paul Tudor Jones, MicroStrategy Inc. and Tesla Inc.—has been the driving force behind bitcoin’s rally, investors say. The expansion of commission-free trading has more recently ushered in a new crowd of retail traders to the space.
“There wasn’t this widespread market rout that you’ve seen in other times, where it infects other asset classes," said Charles Hepworth, an investment director at GAM Investments. “That points to the fact that maybe it’s not as systemic an issue as people thought."
This story has been published from a wire agency feed without modifications to the text.
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