In a move that mimicked the equity selloff in stock markets around the globe yesterday, bitcoin price crashed by as much as 6% in less than two hours this morning. Major coins, such as Ripple’s XRP and Ethereum’s ether, followed suit and cryptocurrency markets crashed by almost 11% in the same timeframe. In monetary terms, the declines translated to a decline of $13 billion. Since the start of this year, cryptocurrency markets have lost approximately 76% of their market capitalization, as of this writing.
According to reports, Asian markets, in particular, are said to have exacerbated the decline. A Bloomberg report states that bitcoin’s steep fall may have occurred due to Japanese day traders selling their bitcoin holdings in order to satisfy margin calls on their stock holdings. Japan’s stock exchange Nikkei and Shanghai’s Hang Seng Index registered falls of 6% and 4% respectively during trading early afternoon. Japan exerts a strong influence on cryptocurrency markets because it has the highest trading volumes for crypto.
An Increased Correlation with Equity Markets?
This morning’s crash calls into question bitcoin’s utility as an alternative investment and store of value. Proponents of the cryptocurrency have claimed in the past that bitcoin is a safe haven from stocks because its price movement does not mirror that of the broader equity markets. But a spate of recent research and studies after the cryptocurrency’s bull run last year have shown a slow and steady correlation between equity and cryptocurrency markets.
“The days of crypto being the safe haven play and having a high degree of detachment from the rest of the world are seemingly diminishing,” said Ryan Rabaglia, head of trading with OSC, a crypto trading firm, in a conversation with Bloomberg. He said “increased institutional attention” was responsible for the correlation between cryptocurrency price movements and equity markets but the trend was not expected to last.
For the time being, the similarity in price movements seems to have affected trader confidence in cryptocurrencies. “If bitcoin cannot make gains in such favorable circumstances then it is unlikely to prosper as and when these issues are resolved,” said Wilson Holden from Juniper Research, a consultancy for technology markets, adding that the cryptocurrency industry was on the brink of an implosion.
A Precarious Time
This morning’s sudden decline in bitcoin comes at a precarious time. Cryptocurrency markets have been in a swoon since the start of this year. But the low prices and a relative absence of volatility (as compared to the stratospheric increase last year) has piqued investors and institutional players have made cautious moves to integrate bitcoin and cryptocurrency-related funds into their portfolio.
Meanwhile, regulators and lawmakers are also exploring various use cases related to cryptocurrencies and bitcoin. A Senate committee on Banking, Housing, and Urban Affairs will explore the utility of cryptocurrencies in a hearing this morning. NYU Economist Nouriel Roubini, who is a vociferous and frequent bitcoin critic, is going into the testimony firing on all cylinders. In prepared remarks that he released yesterday, Roubini compared current crypto markets to a crypto-apocalypse. “The entire crypto-currency land has now gone into a crypto-apocalypse as the mother and father of all bubbles has now gone bust,” he wrote.
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