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Cryptocurrency carnage: Billions wiped off market as Musk says Tesla has 'diamond hands'

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·Senior City Correspondent, Yahoo Finance UK
·5 min read
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Watch: Elon Musk says Tesla has 'diamond hands'

A cryptocurrency sell-off that began last week when Elon Musk turned against bitcoin accelerated on Wednesday, with the world's biggest crypto dropping below $32,000 (£22,562) at one point.

Bitcoin (BTC-USD) fell below the symbolic $40,000 in early trade on Wednesday morning and sunk even further into the red as traders woke up in North America. It touched a low of $31,663.46 before recovering to trade just above $37,000. That level still marked a fall of 15% on the day.

Bitcoin sold off sharply as North America woke up before recovering some of the losses. Photo: Yahoo Finance UK
Bitcoin sold off sharply as North America woke up before recovering some of the losses. Photo: Yahoo Finance UK

Bitcoin's slump hit confidence in the broader market. Ethereum (ETH-USD), the world's second biggest cryptocurrency, fell as much as 30% at one point. By mid-afternoon, it was still down 22% to trade at $2,642.

Date provider CoinMarketCap.com was reporting that the value of the entire cryptocurrency market had fallen by 20% over the 24 hours. The sell-off wiped approximately $350bn off the market's value. 

The price declines coincided with a renewed crackdown on cryptocurrencies from the People’s Bank of China. The central bank issued a statement on its WeChat account reiterating that financial institutions should not accept or deal with cryptocurrencies, the Financial Times reported.

"China has for some time been putting pressure on the crypto space, but this marks an intensification," said Neil Wilson, chief market analyst at Markets.com. "Other countries might follow now as central banks make strides towards their own digital currencies."

Watch: What is bitcoin?

Wednesday's slump extended a slide that began last week after Tesla (TSLA) boss Elon Musk announced his company would no longer pursue plans to accept bitcoin as payment for its electrical cars. Musk — a long-time crypto advocate — cited environmental concerns. Dogecoin (DOGE-USD), a Musk favourite, was down 21% on Wednesday to $0.37.

Musk signalled some support for bitcoin as selling gripped the market. The billionaire tweeted emojis signalling Tesla had "diamond hands" — crypto-speak for a person or company that will hold on to a position no matter what. Tesla disclosed a $1.5bn investment in bitcoin earlier this year, although it has since sold some of its holding.

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Read more: Bitcoin, Dogecoin sink after Elon Musk walks back Tesla's support for crypto transactions

Bitcoin has fallen over 35% since Musk's publicly said Tesla was abandoning its payment plans. It is now around 45% below record highs reached earlier in the year. The cryptocurrency remains up 15% since the start of the year, following a spectacular rally that began last October.

The price of bitcoin has fallen rapidly since Tesla boss Elon Musk withdrew his support last week. Photo: Yahoo Finance UK
The price of bitcoin has fallen rapidly since Tesla boss Elon Musk withdrew his support last week. Photo: Yahoo Finance UK

Bitcoin's run-up was initially fuelled by the embrace of mainstream institutions. Banks, payment companies like Square (SQ) and PayPal (PYPL), and tech businesses such as Tesla or MicroStrategy (MSTR) all announced they were either working with or investing in cryptocurrencies like bitcoin. MicroStrategy has put over $2bn into bitcoin and this week invested another $10m into buying into the price dip. Shares in the company slumped 11% at the open in New York.

Read more: How bad is bitcoin for the environment?

More recently, crypto gains have been fuelled by retail investors piling into the market to take advantage of price momentum. With price growth stalling in recent weeks, some have begun to exit positions.

"The crypto bubble has started to unravel and data from different exchanges suggest that retail investors are capitulating," said Giacomo Pierantoni, a research analyst at Vanda, which produces proprietary data on retail investment flows.

Institutional interest has been fading too, according to JP Morgan.

"Institutional investors appear to be shifting away from bitcoin and back into traditional gold, reversing the trend of the previous two quarters," the investment bank said in a note sent to clients this week.

Bitcoin remains up so far this year after a rapid price appreciation that began in earnest last October. Photo: Yahoo Finance UK
Bitcoin remains up so far this year after a rapid price appreciation that began in earnest last October. Photo: Yahoo Finance UK

JP Morgan and other market watchers had warned that crypto and other asset classes were looking dangerously like a bubble.

"The market has been looking to the news around Tesla and regulatory headwinds out of China as reasons behind the turnaround, though we have been warning for some time that a correction was due given the pace of the bull run this year," said Joel Kruger, cryptocurrency strategist at LMAX Digital, said.

"Much like the Tesla story, we think assigning the pullback to the China news would be a gross exaggeration of the reality that this is indeed a market that has run too far and fast and a market that is still very much correlated to broader risk sentiment."

Wednesday's sell-off coincided with a broader move away from riskier investments like equities across global markets. Sentiment was hit by continued concerns over inflation.

Read more: Why are investors afraid of inflation? 

Recent crypto price declines have sparked angry debate and recriminations among small time investors. Still, many institutional investors and analysts who follow the space remain optimistic about its long-term prospects.

"Bitcoin's pattern over the last 10 years has been meteoric rises followed by pull-backs," said Joe DiPasquale, chief executive of BitBull Capital. "The trends has been higher highs and higher lows: one year ago today, bitcoin closed at $9,927 while it now sits at about $39K. 

"While it's certainly fallen from its $63K high, that is still a 300% rise. The fall in price is a natural consolidation period that we see as necessary for the support lines to form for future appreciation. We remain bullish on Bitcoin and confident that we will see Bitcoin at $100K in the future."

Watch: What are the risks of investing in cryptocurrency?