Explained: Why Bitcoin, Dogecoin, Ether plunged 10% on Thursday

The price of Bitcoin dropped over 10 percent Thursday as investors gave up risky assets following the decline in the equities market and due to fears of faltering global recovery as COVID-19 cases rise due to delta variant.

Bitcoin, the world’s largest cryptocurrency, fell below $32,500 around 1:30 pm Thursday. It is, however, slowly recovering. At the time of writing, the coin was trading 0.13 percent lower at $33,193. Most other digital coins are plunging too. Ether and Dogecoin gave up 10 percent on Thursday and 5 percent on Friday.

The crypto market seemed to be mirroring the equity market. Wall Street suffered the worst daily performance in three weeks. All the three major indices fell almost 1 percent on Thursday. This sell-off was a sharp reversal from last week when indices repeatedly notched record gains.

Here in Asia, shares fell, with Japan leading the losses in the region. Nikkei 225 fell 2 percent on Friday. MSCI’s broadest index of Asia-Pacific shares sans Japan fell nearly 1 percent.

In India, significant indices closed almost 1 percent lower, with mid-and small-caps succumbing to pressure.

The coronavirus woes

Bitcoin slid around the same time Japan declared a state of emergency in Tokyo. The emergency is meant to curb the fresh COVID-19 infections due to the delta variant. Over 100 countries have reported rising cases due to delta variants.

South Korea has reported record daily infections, and Thailand is imposing new restrictions. It is now a dominant variant in the United States and the United Kingdom. Back home, while the cases have largely dropped, North-eastern states have reported a sharp rise.

“We could describe the global situation as being rather fragile. We could also describe it as being at a very critical juncture. After seven weeks of decline in new cases over the last two weeks, we have seen an increase in cases all over the world,” Dr Soumya Swaminathan, Chief Scientist at the World Health Organisation, told CNBC-TV18.

Following the news of Japan’s emergency, the yield on 10-year Treasurys in the US dropped to 1.25 percent.

Volatility rise, returns decrease

Investors are worried about the possibility that volatility may pick up in the markets now. This is also why the sell-off intensified Thursday.

The VIX index moved up 11 percent from 12.21 on Wednesday to 13.64 levels on Friday in India. This peak in volatility levels VIX’s multiple-month lows indicate some caution for the equities. Higher volatility implies lesser returns for investors.

At a time like this, investors would want to wash their hands off risky assets, like crypto.

Why would the volatility pick up?

June was unusually slower for Wall Street. So much so that volatility had dropped from 0.98 percentage point in May to 0.62 percentage points in June, Howard Silverbatt, senior index analyst at S&P Dow Jones, told Wall Street Journal.

This relative silence was because the trading desks were relatively emptier as traders like to take off for vacations in the summers.

While this phenomenon can amplify losses if economic data or monetary policy makes news, generally, it means less volatility.

Now that vacations are over, volatility is likely to increase. But past trends show stocks tend to be positive in July, Silverbatt said. He added that historically, S&P 500 had risen 56 percent of the time, delivering an average gain of 1.6 percent.

Regulators, ahoy!

Investors expecting fresh rounds of crackdowns on cryptos are also engaged in selling. This week, the crackdown in China intensified again when its central bank issued a warning against the stablecoins.

A stablecoin is a cryptocurrency linked to an underlying asset such as the US dollar to keep the volatile crypto stable. Some examples of stablecoins are Tether, USD Coin, and Binance Coin.

“Global stablecoins may bring risks and challenges to the international monetary system,” Fan Yifei, deputy governor of the People’s Bank of China (PBOC), said on Thursday. He added that the central bank was already taking measures against cryptos.

Several European countries are also preparing to launch a crackdown on the market. “The European Union will propose a new agency to crack down on money laundering and new transparency rules for transfers of crypto-assets,” Reuters reported on Thursday.

Over in the States, Senator Elizabeth Warren gave the securities market regulator until the end of July to figure out its role in regulating cryptos.

She warned against the risks the “highly opaque and volatile” crypto market poses to the consumers in a letter to the Securities and Exchange Commission.

Bitcoin has struggled to reclaim its highs since it touched an all-time high at $65,000 in April. While some analysts predict Bitcoin going higher in the long term despite the regulatory headwinds as institutional investors slowly return. Others are saying it could fall as low as $20,000.

$10,000, $20,000 or $30,000?

Old-school commodity trader Peter Brandt kicked off a poll on Twitter about the possible fall of Bitcoin. He also shared a chart showing why he expects Bitcoin may drop below $30,000 soon.

While over 30 percent of respondents said Bitcoin would not break $30,000, 25 percent said it would collapse below $20,000. Another 25 percent believe the coin will hang between the $25-20,000 range, and 19 percent voted for the $25,000-30,000 range.

Simultaneously, another Bitcoin critic, Peter Schiff, the CEO of Euro Pacific Capital, offered a similar commentary. Schiff said the coin would drop below $10,000.

“Bitcoin continues to carve out the right shoulder of an ominous head and shoulders top pattern. If Bitcoin takes out the June low, the market could easily collapse below $10k, especially if leveraged speculators are forced to sell,” he tweeted.

No one seems to acknowledge this possibility, he added.

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