Cue the volatility: Brakes slam on bitcoin’s New Year rally

Bitcoin fell sharply on Monday, losing ground from a record high of $34,800 touched a day earlier, with traders citing volatility in highly leveraged futures markets.

Bitcoin fell more than 14 percent after earlier touching as high as $33,670, wiping out more than half its 20 percent rally from New Year’s Eve to a record $34,800 on Sunday.

Bitcoin was last down eight percent at $30,542.

A functioning cryptocurrency derivatives market has developed since 2017, with offshore exchanges still offering highly leveraged trading. Moves in such markets can have an outsized effect on bitcoin’s price.

“It’s the unwinding of some of that leverage,” said Richard Galvin of crypto fund Digital Asset Capital Management.

Bitcoin’s record high came less than three weeks after it crossed $20,000 for the first time, on December 16. The world’s biggest cryptocurrency more than quadrupled in price last year.

Traders said bitcoin’s drop on Monday was not unusual for the volatile asset, whose wild price swings have in part prevented it from becoming widely used as a currency.

“It’s still an unavoidably volatile asset by its nature,” said Joseph Edwards of crypto brokerage Enigma Securities.

“For the most part, this looks like a purely technical move, signalled and caused by short-term euphoria,” he added.

Smaller coins that often move in tandem with bitcoin also fell, though not as sharply. Ethereum, the second biggest, dropped one percent after touching a three-year high of $1,170.

Fuelling bitcoin’s rally has been the perception it can act as a hedge against the risk of inflation as governments and central banks turn on the stimulus taps to counter the economic impact of the COVID-19 pandemic.

“Some of it is reflecting the fear of a weaker dollar,” Bank of Singapore currency strategist Moh Siong Sim said of its most recent rally.

Still, gold rose two percent, underlining bitcoin’s patchy correlation with the traditional inflation hedge.

Bitcoin’s advance has also reflected expectations it will become a mainstream payment method. Its potential for quick gains has also attracted demand from larger United States investors.