China bans Cryptocurrency, Bitcoin drops below $40,000

A physical imitation of the bitcoin cryptocurrency is seen in Paris on April 26, 2021. (Martin Bureau/AFP via Getty Images)

Bitcoin fell below $40,000 on Wednesday, hitting a three-and-a-half-month low, as investors rushed to sell digital coins after China barred financial and payment institutions from offering cryptocurrency services.

Bitcoin, the world's most famous cryptocurrency, had already been under pressure following a series of tweets from Tesla CEO Elon Musk, but the news from China sent it plummeting to $36,250, a 15% drop in one trading session.

The cryptocurrency has lost 40% of its value since hitting a high of $64,895 on April 14. It's also set to fall for the first time since November 2018.

Other crypto assets were hit hard by Bitcoin's downturn, with Ether, the coin connected to the Ethereum blockchain network, falling as much as 28 percent to $2,426 on Wednesday. It takes the week's losses to 40% after the stock reached a new high on May 12.

According to market tracker Coingecko, meme-based dogecoin also fell, losing nearly 30% at one point.

In pre-market trading, shares of cryptocurrency exchange Coinbase fell 5%. The value of Coinbase's stock has nearly halved since it peaked on the day of its direct listing in April.

Musk's reversal on Tesla accepting bitcoin as payment caused cryptocurrency price declines last week. His subsequent tweets added to the uncertainty about whether the automaker had sold its coin holdings.

Selling was exacerbated by China's announcement on Tuesday prohibiting financial institutions and payment firms from offering services related to cryptocurrency transactions. China has also cautioned investors against engaging in risky cryptocurrency trading.

“The crypto markets are currently processing a cascade of news that strengthens the bear case for price development,” Ulrik Lykke, executive director of crypto hedge fund ARK36, said.

“News like this can gain a lot of momentum and quickly sway market sentiment, but they often prove to be of little long-term significance,” he said.

Some crypto watchers, on the other hand, expected more losses ahead, citing the breach of a crucial technical barrier as a catalyst for more selling.

According to Saxo Bank's Chief Investment Officer Steen Jakobsen, a "widespread deleveraging" was sweeping through cryptocurrency markets, with the selloff being "deeper and more widespread" than previous episodes.

Is There a Hedge Against Inflation?

Investors may also be dumping bitcoin for gold, analysts at JPMorgan said, citing positioning data gathered on the basis of open interest in CME bitcoin futures contracts.

They advised clients that this represents “the steepest and most prolonged liquidation” in bitcoin futures since last October, pointing to “continued retrenchment by institutional investors.”

The crypto asset sell-off comes at a time when inflation worries are on the rise, putting the asset class's potential as an inflation hedge in jeopardy.

More conventional hedges, such as gold, have been gaining ground, with gold up nearly 6% this month.

The recent selloff in bitcoin and other digital currencies has reduced the total market capitalization of all cryptocurrencies to $1.7 trillion, down from a high of $2.5 trillion earlier this month.

Publish : 2021-05-20 11:05:00

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