Bitcoin Dipped 20%, Recovers Half of the Losses on Tuesday
Leading cryptocurrency experiences second-biggest daily dip, while US stocks plunge.
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- Sharp drop for the leading digital coin
- US stocks also experience a drop
Bitcoin, the largest cryptocurrency by market value, plunged more than 20% on Monday, the biggest one-day drop since the March turmoil when bitcoin dropped 29% on March 11. The drop followed a depreciation that started on Sunday as bitcoin lost over 26% of its value over the two days. For the same period, the value of bitcoin decreased by over $185 billion while the total crypto market capitalization lost roughly $300 billion.
On the one hand, the steep sell-off yesterday invoked fears that the renewed price volatility in recent weeks could resemble the price pattern of the 2017 bubble. Supporters of the recent rally and the crypto asset class as a whole, however, argue that this time the increasing valuation differs from previous boom-bust cycles because the market has evolved. Indeed, it now includes institutional investors and enjoys a wider adoption since it’s being offered as a legitimate payment method by companies such as PayPal. More recently, on Jan 9, Tesla CEO Elon Musk admitted he wouldn’t mind being paid in bitcoin.
Market participants are now cautious and waiting to see if the correction will continue to pressure the digital asset as buyers try to bring it up again. So far on Tuesday, bitcoin has been able to erase more than half of Monday’s losses. The number one cryptocurrency is now trading above $35,500, up some $2,000 on the day, or over 6%.
Ethereum, the second-largest digital currency, also suffered a significant blow in the past two days. It lost 32% of its value from Sunday to Monday. While trading at its 2021 top, Ethereum was hovering close to its all-time high of $1,360-$1,380. Currently, the crypto asset is trading in the region of $1,100, recovering from Monday’s low near the $1,000 mark.
All-Time High Followed by Drop
Before the recent collapse, bitcoin was trading at its all-time high as the price reached over $42,000 on Jan 8, marking the end of a monstrous rally that started near the end of October and skyrocketed the price from $12,000 to $42,000, an increase of 250% in less than three months. For the period March – October, bitcoin was steadily climbing as more investment institutions and professional investors rotated towards the crypto market as a way to diversify their portfolio amid the global pandemic. In 2020, the price of bitcoin increased more than four times.
In light of the sharp appreciation of the crypto market, the asset class is drawing the attention of financial regulators. On Monday, the UK’s Financial Conduct Authority warned consumers of the risks involved in investing in crypto assets. The statement describes cryptocurrencies as an asset that involves “taking very high risks” and that if consumers decide to invest in these types of products, “they should be prepared to lose all their money”. The FCA’s concerns about investing in cryptocurrencies include consumer protection, price volatility, product complexity, charges, fees, and marketing materials.
Elsewhere in the markets, US stocks dropped from record highs on Monday, while the US dollar strengthened. The risk-off sentiment yesterday caused the major US indexes to close in the red, led by the tech-heavy Nasdaq Composite, which closed 1.25% lower, followed by the S&P500, down 0.66%. The Dow Jones Industrial Average closed lower by 0.29%. US equity futures point to a moderately green open on Tuesday in the premarket trading, while European stocks are trading mixed and relatively unchanged.