Bitcoin resumes sell-off as China cracks down on cryptocurrency mining

Bitcoin resumed its sell-off on Friday after China reiterated a warning that it intends to crack down on cryptocurrency mining as part of an effort to control financial risks.

The largest cryptocurrency fell 5.5 per cent to $37,615 (€30,861) in mid-morning trading in New York. The statement late on Friday after a meeting of the Financial Stability and Development Committee was the latest blow in a rough week for the cryptocurrency market rattled by forced selling and a possible United States tax clampdown.

China has long expressed displeasure with the anonymity provided by Bitcoin and other crypto tokens, and warned earlier in the week that financial institutions weren’t allowed to accept it for payment. China is home to a large concentration of the world’s crypto miners, programmers who use massive computing power to verify transactions on the blockchain.

Friday’s sell-off hit Bitcoin believers still fuming after one-time proponent Elon Musk did an about-turn and criticised the token for its energy usage. Bitcoin fluctuated about $40,000 (€32,800) in Asian trade, down about 9 per cent on the week, though up from a Wednesday plunge toward $30,000 (€24,600). Other coins have slumped too, such as Ether’s 17 per cent weekly nosedive.

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Elevated volatility

The sour stretch for digital tokens started with billionaire Tesla founder Musk suspending acceptance of Bitcoin payments and trading barbs with boosters of the cryptocurrency on Twitter. China’s central bank added to the downdraft on Tuesday after carrying a statement warning against using virtual currencies. On Thursday, it emerged the US may require crypto transactions of $10,000 (€8,200) or more to be reported to tax authorities.

“Volatility of Bitcoin is to stay elevated,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. Leverage that unwound in Wednesday’s tumble is already being replaced, he added in a note.

This week’s swings led to huge liquidations by leveraged investors and damaged the narrative that cryptocurrencies will become more stable as the sector matures. Musk’s actions showed how a few tweets can still upend the entire market.

Still, over a longer time horizon tokens such as Bitcoin and Ether are sitting on big gains. Over the past year, Bitcoin is up more than 300 per cent and Ether 1,200 per cent.

Regulatory threat

One takeaway from the past few days is a reiteration of the regulatory threat to the crypto market.

“Investors are underestimating the regulatory risk of crypto as governments defend their lucrative monopolies over currency,” said Jay Hatfield, chief executive of Infrastructure Capital Advisors in New York. The possible imposition of transaction reporting requirements could be the “tip of the iceberg” of potential Treasury rules on virtual currencies, he said.

The Bloomberg Galaxy Crypto Index is poised for a weekly tumble of more than 25 per cent, the most since the market turmoil that accompanied the onset of the pandemic last year.

Despite downside risks and this week’s volatility – which saw Bitcoin slide about 31 per cent and jump roughly the same percentage on Wednesday – crypto bulls are undaunted.

They are sticking to the narrative that Bitcoin offers a modern-day portfolio hedge and store of value, akin to digital bullion, and that blockchain-based financial services – so-called decentralised finance – are expanding.

“The institutional investors getting exposure to digital gold aren’t going away any time soon,” Paolo Ardoino, chief technology officer of crypto exchange Bitfinex, wrote in a note on Thursday. “Decentralised finance will continue to grow. Developers will continue to build.” –Bloomberg