Bitcoin selloff resumes after China reiterates crackdown warning

Bitcoin resumed its selloff 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 4.8% to $38,165 as of 11:11 a.m. in New York. The statement late 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 U.S. 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. The country is home to a large concentration of the world’s crypto miners, or programmers who use massive computing power to verify transactions on the blockchain.

Friday’s selloff hit Bitcoin believers still fuming after onetime proponent Elon Musk did an about-face and criticized the token for its energy usage. Bitcoin is down about 20% since last Friday, though up from a Wednesday plunge to $30,000. Other coins have slumped too – Ether is down about 35% over the past seven sessions.

The sour stretch for digital tokens started with Musk suspending acceptance of Bitcoin payments at Tesla Inc. and trading barbs with boosters of the cryptocurrency on Twitter. China’s central bank added to the downdraft Tuesday after carrying a statement warning against using virtual currencies. On Thursday, it emerged the U.S. may require crypto transactions of $10,000 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.

Friday’s selloff once again pushed Bitcoin below its average price over the past 200 days, which to some chartists and technical analysts suggests it could trend lower still to around $30,000, where it found support earlier this week.

Meanwhile, 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 like Bitcoin and Ether are sitting on big gains. Over the past year, Bitcoin is up roughly 300% and Ether about 1,100%.

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 officer 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 30%, 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% 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 decentralized 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 Thursday. “Decentralized finance will continue to grow. Developers will continue to build.”

(Updates prices, adds 200-day moving average)
–With assistance from Kenneth Sexton.