Bitcoin crash unsettles financial markets, with 'contagion' fears surfacing
Crypto enthusiasts at the weekend's convention in Sydney. (ABC News: John Gunn)
In short:
The price of bitcoin has entered a bear market after crashing in November.
Indebted investors are dumping the coin to pay their loans.
What’s next?
Investors have been buoyed by hopes of a US central bank interest rate cut, but sceptics say cryptocurrencies remain a highly risky investment.
The lively interest in all things cryptocurrency was plain to see this weekend.
Enthusiasts descended on Sydney's International Convention Centre (ICC) at Darling Harbour for Crypto Con.
It billed itself as the Southern Hemisphere's largest crypto and blockchain event — a deep-dive into Australia's emerging crypto economy and, of course, a networking opportunity.
"We've just surpassed three million [customers], so we have a huge community and we just want to be here to kind of talk to them and give back," CoinSpot head of marketing Ray Osthmuller said.
"I love crypto. I feel like it's really exciting. It's been awesome to see a lot of big brands and a lot of smart people get involved."
Ray Osthmuller, head of marketing at CoinSpot, says the company has passed 3 million users. (ABC News: John Gunn)
It has been a wild market ride for bitcoin traders in the past few months.
Bitcoin has shed about a quarter of its value over the past four weeks, the most for a single month since June 2022, according to Bloomberg.
The cryptocurrency hit an all-time high of $US125,135 in early October as money flooded into bitcoin exchange-traded funds.
Sentiment was rocked soon after, however, when US President Donald Trump threatened to slap an additional 100 per cent tariff on Chinese imports, triggering the largest liquidation event in crypto history.
Bitcoin sell-off wipes billions from value
Hundreds of billions of dollars have been wiped off bitcoin's value in recent weeks.
"Bitcoin is down almost 31 per cent from its peak in early October, having risen by about 22 per cent since President Trump was inaugurated in late January," independent economist Saul Eslake said.
"I suspect that what's behind it is a growing perception on the part of people who've previously bought bitcoin that it has run way ahead of any plausible interpretation of its potential value."
He said this was most likely buyers who have "established positions in bitcoin or other cryptocurrencies with borrowed money".
Saul Eslake. (ABC News: Kyle Harley)
These leveraged investors can be asked to stump up cash if the value of the asset, in this case bitcoin, falls below a level the lender is comfortable with.
It is known as a margin call and can sometimes be fulfilled by selling the asset that was bought with borrowed money or by selling off other financial assets.
"[The drop has] reawakened concerns about a further wave of forced selling, amid worries that retail investors might need to liquidate other assets to meet margin calls," Deutsche Bank said in a note to clients.
Mr Eslake said this trading activity had seen billions flow out of bitcoin exchange-traded funds or ETFs.
"There've been ebbs and flows into and out of bitcoin-related and crypto-related ETFs over the course of this year, but it would now seem that those outflows are increasing in size and that's why the price has fallen so much over the last few weeks," he said.
Loading...US interest rate hint sets off rush
After last week's sharp falls, the cryptocurrency clawed back some ground over the weekend.
Analysts have speculated that, after all the negative news, a hint from the US Federal Reserve that it may cut interest rates at its December meeting was met with a rush of cash back into both the stock market and bitcoin.
"Obviously, the Trump administration will be putting considerable political pressure on the Fed to cut rates, but the Fed, so far at least, has maintained its independence and it will do what it thinks best," Mr Eslake said.
"Albeit, without a great deal of information on the recent performance of the US economy because of the unprecedented suspension of the publication of economic statistics during the shutdown that's now ended."
Bitcoin is trading near $US87,000 ($135,000), approaching its 100-week simple moving average after failing to hold the 50-week level, which is "a critical support level for long-term trend watchers", BTC Markets Strategist Rachael Lucas says.
Thousands of people turned out to the Australian Crypto Convention at the International Convention Centre, Sydney. (ABC News: John Gunn)
The key question is whether bitcoin can reach new heights.
"As an asset it's clearly volatile, but with stablecoin and more regulatory clarity, the space is really evolving," said Crypto Con attendee Prakash Dhavamani.
However, sceptics remain.
"Since bitcoin doesn't return any income, it doesn't pay interest, it doesn't pay dividends and it has no intrinsic value," said Mr Eslake.
"If you don't believe it's going to keep going up, why hold it?"
And the flow-on effects from a sustained bitcoin bear market have serious consequences for the economy.
"As we saw during the global financial crisis, when the market for subprime mortgage-related debt securities effectively froze up, people had to sell other assets like shares and corporate bonds in order to repay their leveraged debt," Mr Eslake said.
"And that's how contagion spreads from a market like bitcoin into other markets that matter far more for the financial system and ultimately the real economy."