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A massive crypto crash on Wednesday wiped out an estimated $ 1 trillion in market value, a steep drop from $ 2.5 trillion just a week ago. Bitcoin, which accounts for over 40% of the global crypto market, plunged 30% to $ 30,000 on Wednesday, its lowest point since January.
Bitcoin had rebounded slightly to around $ 37,000 on Friday, battered by lingering regulatory issues, and nowhere near its all-time high above $ 64,000 that it hit a month ago.
Volatility is ingrained in the nascent cryptocurrency market, but the explosive growth of digital assets over the past year has attracted hordes of amateur and professional investors looking for a quick profit. Many of them go up and out, or sell in panic when things go wrong, exacerbating gains or losses.
This week, a combination of factors, including government warnings of increased regulation and tweets from influential market player Elon Musk, added fuel to an already nervous market.
What happened?
The crypto market had been particularly fragile for about a week before Wednesday’s crash.
On May 12, bitcoin fell 12% after Elon Musk reneged on Tesla’s pledge to accept bitcoin as a payment method, citing concerns about the cryptocurrency’s massive carbon footprint. Musk added to investor anxiety last weekend with a pair of seemingly contradictory bitcoin tweets that left investors scratching their heads. Then the big crash came on Wednesday, after Chinese authorities reported a crackdown on the use of crypto in the country. The central bank has warned Chinese financial institutions and businesses not to accept digital currencies as a form of payment or to offer services using them.
The threat of increased regulation sparked a panic and bitcoin plunged before rebounding slightly and stabilizing. Other cryptocurrencies fell as well: Ethereum fell over 40%, while dogecoin and binance fell around 30%.
By Thursday, bitcoin had recovered some losses and returned above $ 41,000. But a Friday statement from Chinese officials reiterating the need to crack down on cryptos pushed back bitcoin. It was trading around $ 37,000 on Friday afternoon. Other cryptos were also in the red.
Regulatory concerns
China has long had limits on crypto trading within its borders. Officials said in 2013 that bitcoin was not a real currency and banned financial and payment institutions from using it. Individuals can hold or trade cryptocurrencies, but major exchanges in mainland China have been closed.
On the surface, this week’s statements simply underscored China’s suspicion of cryptocurrencies in general. But they have sent a clear signal that Beijing will not loosen its grip on the market anytime soon. Authorities are also launching a state-backed digital yuan that would keep money flows under strict surveillance.
And it’s not just China. Federal Reserve Chairman Jerome Powell on Thursday warned of the potential risks cryptocurrencies pose to the financial system. Powell also said the central bank will publish an article this summer that explores the implications of the U.S. government developing its own digital currency.
A potential central bank digital currency “could serve as a complement, not a replacement, for cash and current private sector digital forms of the dollar, such as deposits in commercial banks,” said Powell.
The Treasury Department is also turning its attention to the crypto space. Officials on Thursday said any transfer of digital currency valued at $ 10,000 or more must be reported to the Internal Revenue Service.
“Cryptocurrency already poses a significant detection problem by facilitating illegal activities at large, including tax evasion,” the Treasury said in a statement. “Although they represent a relatively small share of corporate income today, cryptocurrency transactions are expected to gain importance over the next decade, especially in the presence of a general reporting regime. financial. “
Bitcoin had risen nearly 6% on Thursday but slashed its gains after statements from U.S. officials, according to Bloomberg.
The future of cryptos
The wild swings of the week have been a test for cryptocurrency fans. True believers tend to see the long term: At the start of 2020, bitcoin was trading around $ 7,000 a coin, which means it’s still up over 400% during that time, even after that. crashing this week.
“We all tend to focus on day to day, week to week,” William Quigley, managing director of the crypto-focused investment fund, said Wednesday. “But that’s not how most people buy cryptocurrencies, or even stocks. Is it a bubble? Probably, according to Ethereum co-creator Vitalik Buterin. In an interview with CNN Business this week, Buterin said he wasn’t surprised by the crash, because he’s seen it all before.
“We’ve had at least three of these big crypto bubbles so far,” he said. “And quite often, the reason the bubbles end up stopping is because some event occurs that clearly shows that the technology is not there yet.”
Laura He, Michelle Toh, Anneken Tappe, Paul R. La Monica, and Matt Egan contributed to this report.
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