Bitcoin plunges after China crackdown

The price of bitcoin fell by almost 30% on Wednesday, after a Chinese government crackdown on banks’ use of cryptocurrencies accelerated a long-predicted sell-off, in a day of chaotic trading.

The world’s largest digital currency tumbled to about $30,000 (£21,000) amid frenzied trading, a drop of more than 50% since it hit record highs of more than $64,000 in mid-April. However, by 10pm UK time, the bitcoin price had risen back to about $38,500, still down 11% on the day, according to Refinitiv data.

Critics have been predicting a sell-off for months, claiming the coin has no intrinsic value. The Bank of England governor, Andrew Bailey, has even warned that investors should be prepared to lose all their money if they dabble in cryptocurrencies. Meanwhile, the European Central Bank has compared bitcoin’s meteoric rise to other financial bubbles such as “tulip mania” and the South Sea bubble, which eventually burst in the 17th and 18th centuries.

The cryptocurrency has come under pressure this week following a string of tweets from Tesla chief executive, Elon Musk, who investors fear has U-turned in his support for the decentralised coins.

But the latest blow came from China, where the financial industry regulators said banks and payment firms were not allowed to offer clients any services involving cryptocurrencies, and warned of the risks linked to trading crypto assets. While the country already has crypto exchanges and initial coin offerings, consumers are still allowed to own crypto assets.

“Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” the regulator’s statement, issued on Wednesday, said.

The news accelerated a sell-off that started last week after Musk, seen as a staunch backer of cryptocurrencies, suspended plans to let Tesla customers pay for cars in bitcoin due to environmental concerns about the energy required to mine them, which contradicted the ethos of the electric car market.

Laith Khalaf, a financial analyst at stockbroker AJ Bell, said the environmental concerns and regulatory risks meant the “tide has turned on bitcoin” and “raised doubt over the long term adoption of cryptocurrency by businesses and consumers”.

But, Ark Investment Management CEO Cathie Wood, who has invested in several crypto-related companies, said that Ark still held a $500,000 price target on Bitcoin.

“We go through soul-searching times like this and scrape the models and, yes, our conviction is just as high,” she told Bloomberg TV. “I think we’re in a capitulation phase. That’s a really great time to buy, no matter what the asset is.”

Earlier this week Musk was also forced to clarify that Tesla had not sold off any bitcoin, following a confusing exchange on Twitter over the weekend about plans for Tesla’s bitcoin holdings.

After bitcoin’s slump, Musk tweeted that Tesla has “diamond hands” – internet slang for holding on to a position despite wild price swings.

Musk’s ability to shift prices with a single tweet has given further ammunition to critics who say cryptocurrencies are too volatile.

Saxo Bank’s chief investment officer, Steen Jakobsen, said the latest sell-off seemed to be “deeper” than previous episodes, and was hitting other cryptocurrencies such as Ether, which plunged 40% during the selloff. It fell from about $3,400 to below $2,000, before later recovering to about $2,850, down 16% on the day, according to Coinbase data.

One-time parody cryptocurrency Dogecoin – based on an internet meme of a shiba inu dog – also tumbled more than 40%, before paring some of its losses on Wednesday afternoon to trade roughly 15% lower at $0.40. Dogecoin has failed to recover after Musk described the virtual currency as a “hustle” during his appearance on US comedy sketch show, Saturday Night Live earlier this month.

“A new widespread deleveraging has sloshed through the cryptocurrency market,” Jakobsen said.

“There is a major bleed across the entire crypto space today,” Neil Wilson, chief market analyst at Markets.com, said, noting that investors might be rightly worried that other countries could follow China’s lead.

“China has for some time been putting pressure on the crypto space, but this marks an intensification – other countries might follow now as central banks make strides towards their own digital currencies,” Wilson said. “Until now western regulators have been pretty relaxed about bitcoin, but this might change soon,” he added.

Shares of Tesla Inc fell 2.5% on Wednesday, underperforming the wider market, as China’s crackdown on cryptocurrencies weighed on the electric car maker. Tesla disclosed in early February it had bought around $1.5 billion of bitcoin, and later sold around 10% for a $101m profit.