This year’s furious rally in cryptocurrencies lost steam on Tuesday, pushing bitcoin and ether prices down from recent highs, as well as 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 bitcoin in circulation, to $ 895 billion, from over $ 1 trillion last week. Ether, the second largest cryptocurrency by total market value, contracted 14% to $ 1,540.
A large shift in cautious markets, coupled with historically high prices, likely triggered the correction, analysts and investors said.
“The types of moves we saw in 2021 were parabolic,” said Joel Kruger, strategist at the LMAX Digital cryptocurrency exchange. “When you see moves like that, it’s obvious these markets are going to have to suffer a downturn.”
The assets – crypto and otherwise – that gained the most during the pandemic have slipped in recent days as investors bet on opening economies. Yields on US government bonds hit their highest level in a year. When yields on safe bonds rise, it makes speculative assets, such as cryptocurrencies and stocks of companies with profits far into the future, less attractive.
There are other catalysts that weigh on cryptocurrencies. Over the weekend, Tesla, the richest lawyer in the crypto world Inc.
Chief Executive Officer 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, often used for illegal transactions, in a newspaper interview. She also said she supports research on a digital dollar backed by the Federal Reserve.
Bitcoin and Ether are the two main cryptocurrencies. They work separately, but are both created when computer “miners” solve complex mathematical equations to unlock or strike new coins.
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Bitcoin was created as a store of value and as a means to facilitate decentralized transactions. Ether is part of a larger Ethereum network, which focuses more broadly on the storage of items, including financial contracts and applications. Unlike Bitcoin, the ether supply is not capped and its supply schedule is determined by members of the Ethereum community, according to CoinDesk.
Both got caught up in an investing frenzy as traders sought dramatic gains. Advocates see 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 behind much of the bitcoin rally since the start of 2020, when it traded close to $ 7,000. Billionaire hedge fund managers have revealed purchases, with Paul Tudor Jones calling them “big speculation.”
Earlier this month, Tesla revealed that it had purchased $ 1.5 billion worth of bitcoin for its corporate reserves. Tesla shares ended Tuesday’s session down 2.2% after falling 13% earlier today.
The shares of companies linked to cryptocurrency and blockchain have also come under pressure. Riot blockchain Inc.
and Marathon Patent Group Inc.
both have fallen by more than 20%. Online retailer Overstock.com shares Inc.,
which allows bitcoin payments, fell more than 7%. Silvergate Capital Corp.
, a La Jolla, Calif.-based bank that has served crypto companies as part of its operations for several years, saw its shares drop 20%.
It is difficult to say where the price of bitcoin could stabilize. Cryptocurrencies are notoriously volatile and subject to large fluctuations in a single day. Determining the fair value of bitcoin is much more difficult than valuing stocks, investors say.
“I imagine a pullback actually adds to its appeal because it takes away some of the foam,” said William Hanbury, a fund manager at UK-based Waverton Investment Management.
That said, it can be difficult to say when the fall in bitcoin might stop, said Hanbury, who monitors bitcoin but does not have any in his wallet. Past corrections have varied considerably in their slope, making it difficult to gauge when investors might want to add exposure.
“You can end up chasing your tail,” he says.
Write to Caitlin Ostroff at firstname.lastname@example.org
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