The dramatic pullback in bitcoin and other cryptocurrencies comes as a flurry of negative headlines and catalysts, from Tesla CEO Elon Musk to a new round of regulations by the Chinese government, have hit an asset sector that has been characterized by extreme volatility since it was created. The flagship cryptocurrency fell to more than three-month lows on Wednesday. The price went down to about $30,000 at one point for a pullback of more than 30%. Also, people keep selling in the crypto space. Ether, the main coin for the Ethereum blockchain network, was also down sharply. It broke below $2,000 at one point, a more than 40% drop in less than 24 hours. The recent slide is a reversal from the dramatic rise that started in the second half of last year. However, the price of bitcoin is still up more than 200% since September.
Part of the reason for bitcoin’s weakness seems to be at least a temporary reversal in the theory of broader acceptance for cryptocurrency. Earlier this year, Musk announced he was buying more than $1 billion of it for his automaker’s balance sheet. Several payments firms announced they were upgrading their capabilities for more crypto actions. Additionally, major Wall Street banks began working on crypto trading teams for their clients. Coinbase, a cryptocurrency exchange company, went public through a direct listing in mid-April. However, Musk announced last week that Tesla would no longer accept bitcoin as payment, citing environmental concerns. He did suggest on Wednesday that Tesla is not selling its existing bitcoin holding, using emojis on Twitter to say the company has “diamond hands.”
What Happened to the Bitcoin Price?
A May 18 statement posted on the Chinese Banking Association’s website said financial institutions should “resolutely refrain” from providing services using digital currencies because of their volatility. Virtually every cryptocurrency fell after the industry group’s statement. Bitcoin slumped to $30,202 before recovering to $38,038, down 12% on the day, according to Coindesk. Most cryptocurrencies lost between 7% and 22% of their value and shares of Coinbase dropped 5.4%. And China isn’t the only country clamping down on cryptocurrencies. Many banks in the Middle East are also barred from dealing in bitcoin. In the U.S., regulators appear to be leaning toward more actively monitoring cryptocurrencies. On Thursday, the Treasury Department said it would require businesses to report any bitcoin payment over $10,000. This is simply an effort to crack down on tax evasion.
Although the price of bitcoin has partly rebounded after last week’s rout, the digital currency remains well off its April 13 high of nearly $65,000. In early trading on Monday bitcoin fetched $38,477, up 12% from the previous day. However, as we mentioned above, the Chinese regulations weren’t the only reason. Tesla CEO, Elon Musk claimed that the Tesla vehicles will no longer be available for purchase through Bitcoin. He made this decision because crypto mining has an awful environmental factor. Since then, the price of all cryptocurrencies has been dropping. At the moment, they are looking to stabilize. Nevertheless, it will be a long time before the market corrects itself. For more information about Bitcoin, check this website.
How strong is Elon’s influence?
Musk announced in February that his electric car company Tesla had invested $1.5 billion in bitcoin. In March, Tesla began accepting bitcoin as payment. Those actions contributed to the run-up in bitcoin’s price, and Musk also promoted the digital currency Dogecoin, which also spiked in value. However, Musk reversed course in just a short time, saying last week that Tesla would stop accepting bitcoin because of the potential environmental damage that can result from bitcoin mining. The announcement sent bitcoin falling below $50,000 and set the tone for the big pullback in most cryptocurrencies.
A number of bitcoin fans pushed back on Musk’s reasoning. Fellow billionaire Mark Cuban said that gold mining is much more damaging to the environment than the mining of bitcoin. A 2019 study by the Technical University of Munich and the Massachusetts Institute of Technology found that the bitcoin network generates an amount of CO2 similar to a large Western city or an entire developing country like Sri Lanka. But a University of Cambridge study last year estimated that on average, 39% of “proof-of-work” crypto mining was powered by renewable energy, primarily hydroelectric energy.
Which companies use Bitcoin?
The digital payment company Square and its CEO Jack Dorsey — also the CEO of Twitter — have been big proponents of bitcoin. Overstock.com also accepts bitcoin, and in February, BNY Mellon, the oldest bank in the U.S., said it would include digital currencies in the services it provides to clients. And Mastercard said it would start supporting “select crypto currencies” on its network. Bitcoin has become popular enough that more than 300,000 transactions typically occur in an average day. Still, its popularity is low compared with cash and credit cards.
The Effects on the Economy
The Financial Stability Oversight Commission recently came out with a report listing challenges to financial stability, and digital currencies merited a very brief mention. According to the agency, virtual currencies have a “very limited” impact on financial stability. This is likely because the current bitcoin ecosystem is fairly small. In contrast, bitcoin is yet to overcome its renegade status within the financial services ecosystem. The increase in its prices has occurred within the confines of unregulated exchanges that are yet to pass scrutiny by regulatory agencies. Based on recent reports, the main players in these exchanges are individual investors and bots.
The European Central Bank said Wednesday that the risk of cryptocurrencies affecting the financial system’s stability looks “limited at present.” In large part, that’s because they’re still not widely used for payments and institutions under its purview still have little exposure to crypto-linked instruments. Earlier this month, the Federal Reserve said a survey of market contacts found roughly one in five cited cryptocurrencies as a potential shock to the system over the next 12 to 18 months. That’s a turnaround from the fall, when a similar survey found none mentioning cryptocurrencies.