Bitcoin volatility puts weekend traders on stomach-churning ride

[NEW YORK] Bitcoin's extreme volatility carried into the weekend as the world's largest cryptocurrency continued to whipsaw investors with double-digit percentage moves.

Bitcoin traded at US$33,052, down 13 per cent, as of 3.45pm in New York, holding below its 200-day moving average; other cryptocurrencies, including Ethereum and Dogecoin, also slumped, according to CoinGecko.com.

Earlier in the weekend, Bitcoin had climbed more than 8 per cent to move back above US$38,000 following a tweet from Elon Musk.

A measure of implied volatility on Bitcoin comparable to the US equity market's VIX indicator sits above 130, higher than the stock version has ever gotten in 30 years.

Thirty-day historical volatility in the coin is about 100, some seven times more than the S&P 500 and surpassing the comparable measure in lumber futures, and an ETF designed to pay twice the daily return in crude oil.

Investors in Bitcoin are experiencing one of its rockiest weeks ever after a string of negative headlines, with prices swinging as much as 30 per cent in each direction Wednesday alone, when it fell as low as US$30,016, the least since January.

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Even with the gyrations, Bitcoin is still up more than 250 per cent in the past year.

The turbulent stretch began after Mr Musk said Tesla would no longer accept Bitcoin as payment for its electric vehicles, citing the coin's intensive energy use.

Another blow came on Friday when China reiterated a warning that it intends to crack down on cryptocurrency mining as part of an effort to control financial risks.

"Bitcoin has two problems, ESG and decreasing reliance on China, both of which could take some time" Edward Moya, senior market analyst with Oanda Corp., wrote in a note.

Other cryptocurrencies also slumped on Sunday, with Ethereum briefly trading below US$1,900 and satirical token Dogecoin dropping more than 16 per cent, according to Coinmarketcap.com.

The latest warning from Beijing followed a statement earlier in the week disseminated by the People's Bank of China that financial institutions weren't allowed to accept cryptocurrencies for payment.

China has long expressed displeasure with the anonymity provided by Bitcoin and other crypto tokens. The country is home to a large concentration of the world's crypto miners who use vast sums of computing power to verify transactions on the blockchain.

"It is no surprise that governments are not inclined to give up their monetary monopolies. Throughout history, governments first regulate and then take ownership," Deutsche Bank macro strategist Marion Laboure wrote in a May 20 report titled "Bitcoin: Trendy Is the Last Stage Before Tacky."

"As cryptocurrencies begin to seriously compete with regular currencies and fiat currencies, regulators and policymakers will crack down."

'HIGHER STAKES'

A mid-week report from blockchain analysis firm Chainalysis showed over half of the US$410 billion spent on acquiring current Bitcoin holdings occurred in the past 12 months.

About US$110 billion of that was spent on buying it at an average cost of less than US$36,000 per coin. That means the vast majority of investments aren't making a profit unless the coin trades at US$36,000 or higher.

"The stakes are much higher now than they were in the past," Philip Gradwell, chief economist at Chainalysis, said in an email. "This week's price fall means that a lot of investments are now held at a loss. This is going to be a serious test for recent investors, but so much is at stake now that there is the incentive and resources to address the problems in crypto that prevent it from becoming a mature asset."

Weekends tend to be particularly volatile for crypto assets which - unlike most traditional assets - trade around the clock every day of the week.

Before this weekend, Bitcoin's average swing on Saturdays and Sundays this year comes in at 5.14 per cent.

That type of volatility is owing to a few factors: Bitcoin's held by relatively few people, meaning that price swings can be magnified during low-volume periods. And the market remains hugely fragmented with dozens of platforms operating under different standards. That means cryptocurrencies lack a centralized market structure akin to that of traditional assets.

"When noise is accompanied by a huge amount of speculation and the noise can be interpreted negatively, you get these huge swings," said Eric Green, chief investment officer of equity at Penn Capital. "What goes straight up is going to come down at some point."

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