This year’s furious crypto rally lost steam on Tuesday, knocking prices of bitcoin and ether down from recent highs, along with declines in other risky assets, including tech stocks.
Bitcoin fell 13% to $ 48,016 after hitting a record high of $ 58,332 on Sunday, according to CoinDesk. The drop pushed its market capitalization, the value of all bitcoins in circulation, to $ 895 billion from more than $ 1 trillion last week. Ether, the second-largest cryptocurrency by total market value, contracted 14% to $ 1,540.
A broad turn in markets toward caution, coupled with historically high prices, likely triggered the correction, analysts and investors said.
“The kinds of moves we were seeing in 2021 were parabolic,” said Joel Kruger, a strategist at cryptocurrency exchange LMAX Digital. “When you see moves like that, it’s obvious these markets are going to face a pullback.”
Assets, crypto or otherwise, that made the most during the pandemic have plummeted in recent days as investors bet on opening economies. Yields on US government bonds have risen to their highest level in a year. When safe bond yields rise, speculative assets, such as cryptocurrencies and stocks of companies with far-off profits in the future, are less attractive.
There are other catalysts that weigh on cryptocurrencies. Over the weekend, Tesla, the richest defender in the crypto world Inc.
Chief Executive Elon Musk tweeted that bitcoin and ether “look high.”
Treasury Secretary Janet Yellen this week called bitcoin a highly speculative and inefficient form of digital currency that is often used for illegal transactions, in an interview with a newspaper. He also noted that he supported the investigation of a digital dollar backed by the Federal Reserve.
Bitcoin and ether are the two main cryptocurrencies. They operate separately, but both are created when computer “miners” solve complex mathematical equations to unlock or mint new coins.
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Bitcoin was created as a store of value and a means to facilitate decentralized transactions. Ether is part of a larger ethereum network, which has a broader approach to storing items, including financial contracts and applications. Unlike bitcoin, the supply of ether is not limited and its supply schedule is determined by members of the ethereum community, according to CoinDesk.
Both have been caught in an investment frenzy as traders chased spectacular profits. Proponents see the currencies, independent of governments and central banks, as a hedge against the degradation of traditional fiat currencies. Skeptics dismiss them as speculative.
A steady stream of institutional demand has been credited with driving much of bitcoin’s rally since the early 2020s, when it was trading near $ 7,000. Managers of billionaire hedge funds have disclosed buyouts, and Paul Tudor Jones called it “big speculation.”
Earlier this month, Tesla revealed that it bought $ 1.5 billion in bitcoin for its corporate reserves. Shares of Tesla ended Tuesday’s session down 2.2% after falling as much as 13% earlier in the day.
Shares of companies related to cryptocurrencies and blockchain were also under pressure. Riot Blockchain Inc.
and Marathon Patent Group Inc.
both fell more than 20%. Online retailer Overstock.com stocks Inc.,
that allows payments in bitcoin, fell more than 7%. Silvergate Capital Corp.
, a bank based in La Jolla, California, which for several years has served crypto companies as a core part of its business, saw its shares fall 20%.
It is difficult to say where the price of bitcoin could stabilize. Cryptocurrencies are notoriously volatile and prone to big swings in a single day. Determining a fair value for bitcoin is much more difficult than valuing stocks, investors say.
“I suppose a pullback actually increases its appeal because it takes some of the foam off it,” said William Hanbury, a fund manager at UK-based Waverton Investment Management.
That said, it can be difficult to know when bitcoin’s slide might be stopped, said Hanbury, who monitors bitcoin but has none in his portfolio. Past corrections have varied greatly in their steepness, making it difficult to assess when investors might want to increase exposure.
“You can end up chasing your tail,” he said.
Write to Caitlin Ostroff at [email protected]
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