Bitcoin’s wild ride just got a bit wilder

A 31% plunge in the morning. A 33% surge in the afternoon. Such was the wild ride bitcoin took investors on Wednesday, lopping off billions in value before comments from some prominent proponents helped propel it on a torrid rebound.

The extreme price swings in an asset known for its turbulence caused outages on major crypto exchanges and dominated chatter on Wall Street.

The tumult elicited a tweet from Elon Musk that implied Tesla Inc. wasn’t among the sellers, while Cathie Wood, founder and CEO of Ark Invest, an investment management firm, said her monitors flashed a “capitulation” that put the digital token “on sale. Justin Sun, a tech entrepreneur who founded the cryptocurrency platform Tron, tweeted that he bought $152 million in bitcoin for around $37,000 a coin.

Down to within a whisker of $30,000 just after 9am in New York, the coin pared its loss to 7% and periodically topped $40,000 again in the afternoon. It resumed declines into the next session and was trading around $35,500 as of early morning in Hong Kong on Thursday.

Ether, the second-biggest coin, sank more than 40% Wednesday before cutting that nearly in half, and ended down 26%. It was down as much as 15% on Thursday.

“The history of these assets (cryptocurrencies) has been littered with aggressive rallies and sickening selloffs,” said Stephane Ouellette, chief executive and co-founder of FRNT Financial.

Rarely do they happen in a single session though.

The intense volatility in crypto dominated Wall Street on a day when stocks and commodities were also under pressure and the US Federal Reserve released minutes from its latest meeting, which was being keenly watched for signs of any drawing down of the liquidity tap.

Frantic selling sparked outages on some of the biggest crypto exchanges, from Coinbase Global Inc. to Binance. #Cryptotrading was trending on Twitter, where critics and fans alike were in a tither over the rout.

Tesla’s touch

Tesla CEO Musk touched off the wild moves last week. Bitcoin plunged when he announced that the carmaker wouldn’t take it as a payment, but then reversed when he said the company had no plans to sell its corporate crypto holdings. He seemed to imply in a tweet Wednesday that Tesla is not selling into the rout.

Meanwhile, a statement by the People’s Bank of China’s on its official WeChat account on Tuesday reiterating that digital tokens can’t be used as a form of payment added to the sell-off. Financial and payments institutions are not allowed to price products or services with virtual currency, the notice said.

“This is the latest chapter of China tightening the noose around cryptocurrencies,” said Antoni Trenchev, managing partner and co-founder of Nexo in London, a crypto lender.

While all of these disparate events were proximate causes for the rout, nothing could explain the frantic rout of Wednesday morning, when the coin dropped thousands of dollars in price in a matter of minutes. Selling gave way to more selling as investors lured into crypto in search of a quick buck bolted for the exits. The selling accelerated when bitcoin fell below its average price for the past 200 days.

Chart-watchers pointed to key technical indicators as the coin sold off. Bitcoin bounced off the $30,000 level and many are waiting to see if it can break back above its 200-day moving average line. If it doesn’t, it could potentially retest Wednesday’s lows in the days ahead.

Cryptocurrency-linked stocks also dropped, with shares of Coinbase falling near 13% at one point and Marathon Digital Holdings Inc slumping as much as 16%.

Bitcoin had earlier embarked on a multi-month rally following Tesla’s February announcement, soaring to its $64,870 peak, in large part due to the company’s embrace.

Wiped out

At the time, Tesla’s acceptance was hailed as a watershed moment for the coin, with many in the crypto world seeing it as yet another step in its evolution.

All that’s been wiped out following Musk’s head-spinning tweets. “Realistically, it is not the first time Elon Musk’s tweets have been erratic and, frankly, wrong,” said Ulrik Lykke, executive director at crypto hedge fund ARK36. “The crypto markets are extremely emotionally driven, and their participants are prone to overreacting to events they perceive as negative.”

Not only is the crypto market extremely nervous this week, but as is the case with markets, crypto managed to maximize the pain.

The rise of a slew of coins went on just long enough to pull in a bunch of otherwise sensible money. And then, they made them pay.

The siren song reached a peak with Coinbase Global Inc.’s market debut on 14 April. The direct listing of the largest US crypto exchange supercharged theories that crypto had made it to the investing mainstream, that Wall Street’s embrace lent legitimacy to the asset class and that the sky was the limit. Retail investors flooded in.

Veterans of the 2017 bitcoin bubble no doubt had flashbacks. Back then, when the token dominated holiday conversations as its year-to-date gains approached 1,800%, CME Group Inc ushered Bitcoin into the mainstream with the introduction of the first contract on a US-regulated exchange.

Their debut, on 17 December 2017, sent bitcoin to a record $19,511 the next day. But pressures from the increased scrutiny from regulators around the world caused the coin to plunge about 40% by 17 January 2018.

A similar dynamic is seemingly at play now as bitcoin falls back to earth, with sell-offs spurring more sell-offs.

“The expansion of the holder base has been remarkable over the past year, especially thus far in 2021,” said Michael O’Rourke, chief market strategist at JonesTrading. “New speculators are learning for the first time what happens when a bubble pops.”

“The crypto bubble has started to unravel and data from different exchanges suggest that retail investors are capitulating,” noted Vanda Research analysts Ben Onatibia and Giacomo Pierantoni in a note Wednesday.

They found that speculative activity in bitcoin started to drop in April, as the open interest in Ether futures rose. Then, leveraged positions in both currency futures fell sharply last week. That’s when Elon Musk posted a mass of head-spinning tweets criticizing bitcoin’s energy use.

New entrants to crypto are especially running for the exits, according to a note from Glassnode Insights. About 23% of crypto wallets are now at a loss, and 1.1 million of the addresses have spent all coins they held during this correction.

“It speaks to some of the speculative excess that built up in thematic-type investments, whether you’re talking about some of the hyper-growth companies or bitcoin,” said Dan Russo, portfolio manager at Potomac Fund Management. “That story got super-hot and some of that speculative excess is rolling off.”

He added that a case could be made that the current episode is a repetition of what’s been seen in speculative manias throughout history.

Adding insult to injury, on Wednesday, European Central Bank vice president Luis de Guindos warned that crypto assets shouldn’t be seen as a “real investment” because their underlying value is hard to discern, and market participants should brace for more price swings.

“Cryptocurrencies clearly won’t reach full potential unless they can penetrate the mainstream—all of that momentum seems to be reversing itself in the face of Tesla’s mood change, China’s new stance and the likelihood of eventual regulation on the US side,” said Mike Loukas, chief executive officer at TrueMark Investments.

Outages galore

Meanwhile, things have spun out of control even at the world’s two largest digital asset exchanges, Binance and Coinbase Global Inc., which suffered service outages.

Exchanges are central components to the digital asset world, yet they frequently go down when traffic on blockchain networks gets too high, calling into question their readiness to serve a quickly growing market. At the height of the last bull market in 2017, both Coinbase and Binance often shut users out of their accounts due to internal problems. Blockchain and crypto believers like to think that they’re changing the world, yet the backbone of the industry is clearly not ready for prime time.

Many traders in crypto use borrowed money to boost their returns, which leaves them vulnerable to having their positions automatically sold if prices drop. In the last 24 hours, more than 775,000 traders have had their account liquidated, equal to $8.6 billion worth of crypto, according to Bybt.com data.

“Coinbase always goes down,” said Jon West, the former head trader at digital asset brokerage Omega One who now works for the blockchain firm RChain. While it was disappointing to see the two largest exchanges break, West said this is the best they’ve ever performed when looking back at 2018 or 2019.

“It should be illegal how bad they’ve been” in the past, he said. An email to Coinbase for comment wasn’t immediately returned.

The trouble on Wednesday began when Binance, the world’s biggest cryptocurrency exchange, temporarily disabled ethereum withdrawals citing network congestion. Then, Coinbase said it was investigating “intermittent downtime” on its platform. Binance is looking to fix its issues in the coming months, Brian Brooks, chief executive officer of Binance US said in a Bloomberg Television interview.

“We have way too many customer support issues on backlog,” he said. “I know it’s a big deal, I’ve gotten that feedback,” Brooks said. “We’re all over this and you’re going to see a different customer experience very shortly.”

“It’s definitely a bad experience for people who are used to their traditional brokerage account,” said Aubrey Strobel, head of communications at Lolli, a bitcoin rewards company. Centralized markets like Binance and Coinbase are how newcomers enter the crypto market, she said.

“It feels like it should be better, especially at Coinbase,” she said. “It’s kind of funny, it’s a forced ‘hodling’ by these exchanges because you can’t sell,” said Strobel, using the crypto slang “hodl” that began on a message board as a drunken misspelling of hold.

decentralized exchanges

The fact remains that a key point that has brought so many people into crypto plagues the exchanges—they are a central point of failure that often go down when markets get choppy. That was a key reason bitcoin and the cryptocurrencies that followed it were embraced—they have no central point of failure because the blockchains they are built upon are distributed on thousands of computers spread all around the globe.

The exchanges are also less transparent when it comes to explaining to users what’s happening behind the scenes when things go wrong. When RChain’s West was asked about what exactly was wrong at Coinbase and Binance he said, “I don’t have a clue.” And that’s the problem.

“That’s the story of centralized exchanges,” West said. A new type of market known as decentralized exchanges have become popular in the past year in part because they are not run by a company like Coinbase or Binance. Instead, they match buyers and sellers using smart contracts—computer programs—in a peer-to-peer system.

West said he thought this latest exchange outage would only lead to more decentralized exchange adoption. “That’s why people are so into decentralized exchanges,” he said. “This can’t happen. Only the network gets clogged.”

He also noted that brokerages and markets like the New York Stock Exchange have had very public and embarrassing outages. Earlier this year, Robinhood suffered a devastating loss of confidence when it shut its users out of their GameStop positions.

“TD Ameritrade and Schwab go down all the time when markets are volatile,” West said. Back in the crypto world, West said he was doing his best to manage his investments. “Today is a day of survival,” he said.