Bitcoin fell nearly $2,000 in a matter of minutes in a sharp crash, a reminder of the cryptocurrency’s volatility even as it has soared this month to its highest level since last year’s boom-and-bust cycle.
In late New York trading hours on Wednesday, bitcoin fell from $13,850 to under $11,900 in under an hour, according to Refinitiv data. That took some of the sheen off a rally that has seen bitcoin jump from just over $5,000 at the beginning of May, evoking memories of the cryptocurrency’s last boom-and-bust cycle.
By Thursday morning in London bitcoin was tumbling again and trading at around $11,500.
Some attributed the slump to a brief shutdown of Coinbase, a San Francisco-based platform which is among the most popular of cryptocurrency exchanges. But Alistair Milne, chief investment officer of the Altana Digital Currency Fund, said that the rapid correction was "inevitable - you simply don't go up this quickly and sustain it forever, followed by consolidation".
He added: “This is not 2017’s boom and bust, we haven’t seen new retail investors coming in as we did [then].”
Other digital currencies including ethereum and litecoin were also trading lower, according to cryptocurrency information provider CoinDesk, having been swept higher by the euphoria surrounding bitcoin.
Analysts said the bout of enthusiasm for virtual currencies had been stoked by a confluence of factors.
Facebook plan
Among the most significant is Facebook’s move into the world of crypto, launching its own currency called libra in an attack by big tech on the payments industry. Analysts are optimistic that libra could help cryptocurrencies generally gain more mainstream acceptance, as means of payment and as a store of wealth.
“Adoption is obviously key for this space so the Facebook news is... being viewed positively,” said Craig Erlam, senior market analyst at Oanda.
Mr Erlam added that bitcoin had struggled for legitimacy among traders since the last crypto bubble burst at the end of 2017, prompting the bitcoin price to plunge about 80 per cent from its peak of more than $19,000.
But analysts cautioned that traders were ignoring crucial differences between libra and more established digital currencies such as bitcoin.
"Libra is backed by a reserve of real assets - such as bank deposits and treasury bills. That gives it intrinsic value," said Margaret Yang, an analyst at CMC Markets.
She noted that, in theory, that should ensure some stability in its price. Many other major cryptocurrencies, most notably bitcoin, were “backed by nothing”.
Demand for cryptocurrencies is also being fanned by a recent dovish shift by the world’s biggest central banks, say analysts.
The US Federal Reserve and the European Central Bank have strongly hinted that they will tilt towards monetary easing in the coming months amid signs the global economy is cooling. Meanwhile, the value of negative-yielding bonds has reached a record high of $13tn globally, increasing the relative appeal of yield-less assets such as gold, whose price has soared to more than $1,400 per troy ounce this week.
Scarcity value
Unlike fiat currencies, the supply of new bitcoins is not controlled by any central bank and the number of tokens in circulation is fixed, giving it scarcity value during times of monetary expansion. “Cryptocurrency [is]scarcer in nature than traditional currency, in particular during an era of loose monetary policy,” said Ms Yang.
Geopolitical and global political unrest may also be playing a role in pushing up demand. There has been an increase in tension between the US and Iran in recent days, while an estimated 2 million protesters took to the streets in Hong Kong this month demanding the withdrawal of an extradition bill.
“Bitcoin is independent of governments and financial institutions, so the more you see an erosion of trust, the more the demand for bitcoin,” said Mati Greenspan, senior market analyst at eToro, a Tel Aviv-based brokerage.
He noted that the local price of bitcoin had recently risen in hotspots of political turmoil, including Hong Kong and Tehran.
Copyright The Financial Times Limited 2019
