No one knows the true value of Bitcoin, only that it has been rising the past few weeks or so. But for how long will the climb continue?
Bitcoin’s plunge extended to almost 30% Friday as the frenzy surrounding digital currencies faced one of its biggest tests yet.
The world’s largest cryptocurrency approached $10,000 as this week’s selloff entered the fourth day with increasing momentum. It touched a record high $19,511 on Monday. Other cryptocurrencies also tumbled, ethereum dropped as much as 36% and litecoin slumped as much as 43%, according to composite prices on Bloomberg.
Bitcoin dropped to as low as $10,776. It last traded below $10, 000 on December 1, when the US Commodity Futures Trading Commission agreed to allow trading in bitcoin futures. For the week, the decline is as much as 39 per cent. That follows gains of 13 per cent, 44 per cent and 32 per cent in the prior three weeks.
The losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, which have rapidly entered the mainstream in recent weeks. Bears cast doubt on the value of the virtual assets, with UBS Group AG this week calling bitcoin the “biggest speculative bubble in history.” Bulls argue the technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current selloff.
“The sharks are beginning to circle here, and the futures markets may give them a venue to strike,” said Ross Norman, chief executive officer of London-based bullion dealer Sharps Pixley Ltd., which offers gold in exchange for bitcoin. “Bitcoin’s been heavily driven by retail investors, but there’ll be some aggressive funds looking for the right opportunity to hammer this thing lower.”
Traders who bought the currency on futures exchanges using collateral may start facing margin calls following the price decline. Two venues launched products in recent weeks that required hefty security, with Cboe needing 44 percent to clear contracts, and the CME 47 percent. Brokers set safety nets even higher.
“There’s no doubt people who got in on margin will face some pressure here,” Norman said by phone from London. “The volumes weren’t huge, so it won’t be a major price driver, but for those caught on the wrong side it will hurt.”
Crypto Mania
Many of the recent news stories and market moves connected to cryptocurrencies appear to carry hallmarks of the mania phase of a bubble. Long Island Iced Tea Corp. shares rose as much as 289 percent after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain Corp. Bank of Japan Governor Haruhiko Kuroda said on Thursday bitcoin isn’t functioning like a normal means of payment and is being used for speculation.
Still, cryptocurrencies are attracting established players. Goldman Sachs Group Inc. is setting up a trading desk to make markets in digital currencies such as bitcoin, according to people with knowledge of the strategy. The bank aims to get the business running by the end of June, if not earlier, two of the people said.
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