(Barron’s) — Bitcoin plunged to its lowest level since February on Wednesday, hitting a low of $30,200, down by more than half from an all-time high of $64,829 it reached just last month.
Ether, the second most valuable cryptocurrency, was down 21% as well on Wednesday.
The fallout was hitting stocks that have ridden the crypto boom. Square (ticker: SQ) dropped 4% and PayPal Holdings (PYPL) was off 1.5%. Companies with even more of their business models tied to the price of cryptocurrencies dropped even more precipitously, with crypto exchange Coinbase Global (COIN) falling 8% and business software firm MicroStrategy (MSTR), which has bought billions worth of Bitcoin, down 11%.
Some crypto users couldn’t sell even if they wanted to. Coinbase users complained about trouble accessing the app. The company said “some features may not be functioning completely normal” and it is investigating.
MicroStrategy’s CEO Michael Saylor, among the most important evangelists for crypto had a short message on Twitter: “I’m not selling.”
Bitcoin had recovered to about $36,000 by 10:45 a.m. Eastern time, still down 19% in the past 24 hours. But even getting a definitive price was tricky. CoinDesk, among the most popular sites for crypto information, was down for part of the morning, and was showing different prices than coinmarketcap.com, another hub for data, and Coinbase. At about the same time, Coinbase was showing $36,998, while coinmarketcap showed $36,429—the kind of spread that used to happen in crypto but that had diminished in the past couple of years as the market became more liquid.
Late on Wednesday morning, Bitcoin rebounded as some investors bought on the dip. Genesis, a digital currency prime broker, said that it was seeing interest from macro funds at around the $35,000 price level. And Tesla CEO Elon Musk tweeted emojis of a diamond and hands, a reference that in social media parlance implies Tesla (TSLA) will hold its Bitcoin stake despite the selloff. Bitcoin rose after the tweet and even briefly exceeded $40,000.
As of 3:15 p.m., Bitcoin was trading around $38,600.
All of the gains Bitcoin accrued since Tesla got involved with the cryptocurrency have now been erased. And as with many things in crypto, it’s difficult to pinpoint the catalyst for the selloff.
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Matt Hougan, chief investment officer of crypto fund provider Bitwise Asset Management, told Barron’s that the drop was caused by “short-term forced and panicked selling by retail investors who entered the market in the past year, spooked by a mix of bad news and misinformation, and turbocharged by the procyclical leverage that’s an inherent feature of the crypto market.”
Looking at patterns on the Bitcoin blockchain itself, he said he sees funds moving from overseas retail investors to institutions in the United States, “which is a good thing for the long-term. But in the short-term, volatility is a part of the market.”
The market has been dropping since Elon Musk began questioning Bitcoin’s negative environmental impacts about a week ago. One more recent catalyst may have been China’s decision to reiterate its ban on financial institutions facilitating crypto transactions.
In the crypto market, momentum can turn quickly and selloffs can accelerate as people try to lock in gains made in the latest bull market. Anyone who bought cryptocurrencies in 2020 is still showing a large paper profit, but may be getting anxious that those gains won’t hold for long.
This “no doubt this will scare investors just as all pull backs in all markets scare investors” Jim Paulsen, chief investment strategist at The Leuthold Group, wrote in an email to Barron’s. Paulsen is a more traditional investor who has warmed to Bitcoin in the past year. The selloff isn’t shaking his interest in crypto — he still thinks it’s worth allocating 1% or 2% of a portfolio into it. And he likes that the volatility makes it possible to rebalance frequently when prices go up and down.
One thing Paulsen is watching for is whether the selloff bleeds into the larger market. The S&P 500 was down 1.3% on Wednesday morning. “Note that the other 3 times crypto did this, the stock market suffered a correction or a bear market,” he wrote. “So part of the crypto story may depend on what the stock market does from here? Does it recover soon or is this a full blown, longer-lasting correction for stocks?”
Saylor and other Bitcoin bulls have said that Bitcoin is an effective hedge against inflation, because the number of Bitcoins is capped at 21 million, theoretically making it impervious to the “money-printing” common with fiat currencies. Prominent hedge-fund managers like Stanley Druckenmiller have bought Bitcoin under that premise, and some analysts have found that Bitcoin has been stealing gold’s thunder.
But as inflation fears grow in the United States, there is evidence that institutional investors are returning to their familiar inflation hedge.
Investors have been pulling money out of Bitcoin futures and funds and putting more of it into gold, according to a new analysis by J.P. Morgan strategist Nikolaos Panigirtzoglou. That’s a shift from the prior two quarters, he wrote. On Wednesday, the spot price of gold was up 0.8% to $1,883.20 per ounce.
“The Bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors,” he wrote.
The four-week flow of institutional money into Bitcoin funds went negative for the first time at the end of April, just after Bitcoin hit its new highs around $64,000. It’s not immediately clear why institutions are starting to pull money out, but clearly there has been a run for the exits in the past month.
“Perhaps institutional investors are fleeing Bitcoin as they see its previous two-quarter uptrend ending and thus seek the stability of traditional gold away from the rapid downshifting of digital gold,” Panigirtzoglou wrote.
It’s not just institutions. Panigirtzoglou also estimates that retail interest has declined, too, with an expected decrease in purchases of Bitcoin by Square.
Panigirtzoglou uses a unique method for valuing Bitcoin — what he calls a “volatility ratio.” Based on that ratio, he estimates that Bitcoin’s fair value is $35,000. His report came out before the selloff steepened. If Bitcoin became as popular as gold in investor portfolios, it could rise as high as $140,000. But he doesn’t expect that anytime soon.
“This $140k price should be thought of as a long-term theoretical target assuming a convergence of Bitcoin volatility to that of gold and an equalization of Bitcoin allocations to that of gold in investor portfolios,” he wrote. “Needless to say such convergence or equalization of volatilities or allocations is unlikely in the near future.”
Article originally published by Barron’s