The rapid drop washed out over $5 billion worth of positions in traditional futures markets where investors can bet on the price of cryptocurrencies, reducing the number of outstanding bets by almost a quarter. Bitcoin prices have jumped more than 500 percent in the past two years, with some investors—primarily amateur retail investors but also some professionals—drawn in by the theory that returns could be uncorrelated to other assets. But as more hedge funds and other big investors get involved, links with other markets tighten. Many professional investors had also been keen to crystallise paper gains into real returns before the end of this year, which contributed to the sell-off, said Jan Stromme, founder of crypto trading company Alphaplate.
The resurgence of coronavirus, weak jobs data and comments from Federal Reserve chair Jay Powell hinting at an earlier than expected rise in interest rates jolted investors to rethink their bets and switch out of assets that thrive when global growth is strong. “Bitcoin’s sell-off gathered pace] as general market jitters escalated,” said Lim. That offers a reminder that while bitcoin is seen as one of the safer cryptocurrencies, compared with even more volatile bets such as dogecoin, it is still vulnerable in moments of market nerves.
Prices failed to fully recover by Tuesday, with bitcoin trading at $51,265. Professional investors dipping a toe into crypto generally lack the almost religious belief in digital assets common among the hardcore fan base of retail investors who insist on holding on to digital coins come what may. Hedge fund manager Beat Nussbaumer said, “We have to think that it is just another risky asset that will rally when the world is a good place and sell off when it is not.”
Some had welcomed institutional investors into the market in the hope that they would fire up the price, but the weekend sell-off suggested it also introduced new vulnerabilities. Many professional investors are now cautious about crypto after watching bitcoin prices rapidly fall over a period of 48 hours.
This could be a sign that traditional markets are having an increasingly dominant impact on currencies, which have been known to take their cues from global mood swings. The rapid drop also washed out over $5 billion worth of positions in traditional futures markets where investors can bet on the price of cryptocurrencies, reducing the number of outstanding bets by almost a quarter.