After days of turmoil, Bitcoin fluctuated around $20,000 last night. This was in spite of fears of a “crypto winter” that could cause shockwaves throughout the global economy.
Over the weekend, the digital currency plummeted to $17.772 as investors continued to rush for the exit.
A slight rebound towards $20,000 was not enough to calm nerves, with bitcoin falling more than 30% this month and 70% since November’s all-time high of $70,000.
Other cryptocurrency have also been affected by the sell-off. Ethereum fell 70% this year, while dogecoin, which was initially created as a joke and gained a following after being attracted to Tesla founder Elon Musk’s attention, has fallen 90% since its peak.
Many of the 2million plus British crypto investors are now suffering heavy losses.
The recent low interest rates and quantitative easing by central banks to flood the market with cheap money drove the crypto rush.
They were not only offered ‘loose’ financial terms, but were also taken in to the scam by celebrities like Snoop Dogg and Matt Damon, who were paid to advertise the currencies online.
Reese Witherspoon and Paris Hilton are also admirers, as is Musk.
Recent panic attacks on crypto markets have wrought havoc with fears of runaway inflation, higher interest rate, global recession, and war in Ukraine.
As the crypto lender Celsius Network was on the verge of collapse, it stopped customer withdrawals last week.
The chaos spread and crypto exchange Binance blocked users access to their bitcoin holdings.
Two days later, the US Federal Reserve increased its main interest rate by three quarters of a point. This was the largest increase since 1994.
The Bank of England followed suit, raising rates by 25% to 1.25 percent, marking its fifth consecutive increase. Inflation could reach 11 percent this year, the Bank warned.
Panic grew further as central banks on both sides signalled that they would continue to raise rates aggressively in order to control inflation.
Analysts warned investors that they should prepare for a hard winter after the steep fall.
Markets.com analyst Neil Wilson stated that “all anyone is talking about are the chill winds blowing in the crypto winter.”
“Rising interest rates, a risk-off mood across the markets, and a loss of liquidity are all to blame. In short, the Fed’s end of free money means that the artificial pump that created these assets is no more working.
Bitcoin is more popular in America than anywhere else. 16% of Americans say they have used or invested in it. This is up from 1% in 2015.
Its meteoric rise occurred despite warnings by authorities and top investment bankers, who repeatedly stated that crypto was of no value.
Jamie Dimon, a Wall Street veteran and chief executive at JP Morgan, called bitcoin “worthless” last May.
Corporate companies and hedge funds are also vulnerable to crypto. Coinbase, America’s largest cryptocurrency exchange, announced plans to lay off 1,100 employees. Babel Finance, another cryptocurrency company froze all accounts due ‘unusual liquidity tensions’.
Three Arrows Capital failed lenders’ demands to raise additional funds after its digital currency bets went sour. This led to the crisis of the crypto hedge fund.
Tesla, an electric car manufacturer, is the worst. It revealed that it had 43,200 bitcoins worth almost PS1.6billion in December.
They are only a fraction of what they were today.
Musk showed no regrets despite the loss and tweeted his support for crypto industry and dogecoin Sunday.
Although crypto is seen as a hobby for many investors, experts warn that the collapse of the industry could have grave consequences for the financial system. This could impact the main assets in London and Wall Street.
2008 saw a drop in credit product prices based on sub-prime US mortgages. This led to a global banking crisis, recession, and the loss millions of jobs.
Crypto has also made its way into real financial systems, with well-known asset managers such as Invesco and Fidelity offering a variety of exchange traded products.
Already, the fall of crypto markets coincides with a slide for equities. Last week saw the largest weekly percentage decline in US stocks in two years.
Malcolm Freeman, a broker at Kingdom Futures, stated that “investors are being wiped out” and asked the question: “Are those investors also involved with equities?”
He stated that if these investors “run for the exit” and sell their shares, ripples will be felt in other markets.
While contagion has not yet occurred to the financial system, there are growing concerns about the potential impact of a severe crypto winter.