Bitcoin and other cryptocurrencies smashed as investors seek safer ground

Bitcoin and other cryptocurrencies suffered steep declines, losing up to $500bn in value in a single day, as jitters over the impact of Covid-19’s Omicron variant rattled investors.

Some analysts are concerned that a slowdown in the economic recovery would reduce investor interest in more speculative assets such as cryptocurrencies.

Bitcoin and other cryptocurrencies suffered steep declines – losing up to $500bn in value over a single day – as jitters over the impact of Covid-19’s Omicron variant rattled investors and sent them looking for safer ground.

The downward spiral for Bitcoin began on Saturday morning before gathering momentum after late-afternoon selling.

Between Friday evening and late Saturday afternoon Saturday, bitcoin fell from $US56,740 to $US44,800.

As of Sunday afternoon, Bitcoin was nine per cent lower than the previous week – with a market capitalisation under $US1 trillion ($1.43 trillion) for the first time since October.

Bitcoin, as well as other major cryptocurrencies like Ether, are notoriously volatile but jumped in value in the last year.

Despite the wide fluctuations, some of the country’s largest financial institutions are increasing their offerings, with Commonwealth Bank the first to allow customers to trade crypto assets through its platform.

Last month the Reserve Bank’s head of payment policy Tony Richard warned that cryptocurrencies could lose value as quickly as they had gained it.

“Households might be less influenced by fads and a fear of missing out and might start to pay more attention to the warnings of securities regulators and consumer protection agencies in many countries about the risks of investing in something with no issuer, no backing and highly uncertain value,” he said in a speech on November 18.

Concerns about the Omicron variant’s effect on the global economy have not abated, with an International Monetary Fund official warning over the weekend that new Covid-19 outbreaks would “dent confidence, and in that sense, we are likely to see some downgrades of our October projections for global growth”.

In particular, some analysts are concerned that a slowdown in the economic recovery would reduce investor interest in more speculative assets such as cryptocurrencies.

“In our view, the speed with which global liquidity contracts is the most important factor for cryptocurrency performance in the weeks ahead and possibly even into early 2022,” analysts at one platform, Coinbase, wrote to their customers this weekend.

Over Sunday, however, Bitcoin prices recovered almost five per cent to around $US49,600. The price of Ether, the second most popular currency, also made up sharp falls.

There are other factors that suggest a series of headwinds for cryptos, including concern over US Federal Reserve efforts to curb runaway inflation.

China, which banned cryptocurrency transactions and other tokens in September, could be joined by Russia, which has already introduced tax laws and banned public servants using the currency. Law has been proposed to confiscate cryptocurrency obtained through crime.

The US continues to debate the regulation of cryptocurrency use.

The record prices of late October and early November, when Bitcoin hit more $90,000 and other currencies achieved record levels, seem far away.

The continuing volatility of prices may be finally taking a toll on more nervous investors who are selling their crypto for a loss, fearing a complete crash in value - as some predict. Crypto can fall in minutes.

Some stay in the market during these plunges, riding out the highs and lows expecting longer-term gains. Others seek to profit from these big drops, selling their crypto while still highly valued and buying it back when the price bottoms. Short selling cryptocurrency is a dangerous but seemingly common activity.

There are signs of more volatility ahead with a recent report of “whale” investors moving their crypto from private wallets to trading venues.

The RBA has also repeatedly noted its concerns about the rise in so-called “meme coins” – faddish crypto assets with little value – including in meeting minutes published in November.

In a parliamentary hearing later that month, Australian Securities and Investments Commission chairman Joe Longo said he would follow his own advice and not invest in the asset class – because he did not understand it.