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Bitcoin Drops Most in Two Months as Global Markets Turn Risk Off

Bloomberg logoBloomberg 8/19/2022 Sunil Jagtiani and Vildana Hajric

(Bloomberg) -- Cryptocurrencies suffered a sharp selloff as global markets retreated after US Federal Reserve officials reiterated their resolve to keep raising interest rates until inflation is contained. 

Bitcoin, the largest virtual coin by market capitalization, tumbled as much as 9.2% to $21,271, the biggest intraday drop since June 18. Ether and smaller tokens saw even sharper declines, with Avalanche, Cardano and Solana falling more than 10%. 

Digital assets are getting punished as investors unwind bets that the Fed might raise interest rates less than initially feared. Optimism about more favorable liquidity conditions drove a more than 40% rally in Bitcoin since June’s crypto market crash, while Ether more than doubled at one point. 

A big chunk of the day’s losses came all at once during Asia trading, when Bitcoin lost almost 5% of its value versus the dollar in roughly a minute just before 2:45 p.m. Singapore time. Such mini-crashes are rare but not unheard of in online currencies, where futures transactions often dominate price action and are subject to near-instantaneous liquidations by automated engines. 

Largest crypto suffers a trademark bout of volatility © Bloomberg Largest crypto suffers a trademark bout of volatility

About $220 million of crypto positions got liquidated in the span of an hour on Friday, with Bitcoin accounting for roughly half of that, according to data from Coinglass. 

“Bitcoin is a speculative asset and speculative assets don’t do well during tightening regimes, when the central bank is tightening and liquidity is becoming more scarce,” Jose Torres, senior economist at Interactive Brokers, said in an interview. “It does not surprise me that Bitcoin has erased a lot of its gains from recently reaching $25,000.”

Digital tokens slumped amid broad declines in equity markets, with the S&P 500 and the Euro Stoxx 50 each slipping about 1%. 

Altcoins Pummeled

The latest reversal in sentiment has hit altcoins, which tend to be more volatile than Bitcoin and Ether, especially hard. Solana tumbled as much as 14% on Friday, the biggest drop since June 13, and Cardano fell by a similar magnitude.  

Cryptocurrency prices have fallen sharply since May, when the collapse of stablecoin project Terra set off a wave of liquidations, bankruptcies and layoffs in the sector. Bitcoin’s price has rebounded since hitting a low of $17,599 on June 18, but remains down 54% this year.

The recovery is looking increasingly fragile as traders struggle to get a clear sense of the direction of Federal Reserve monetary policy. Two Fed officials, James Bullard and Esther George, on Thursday gave divergent signals on the size of the next interest-rate hike. However, both reiterated the need to keep raising borrowing costs. 

Fed Officials Offer Mixed Signals on Size of September Rate Hike

Attention now turns to the Fed’s annual symposium in Jackson Hole, Wyoming next week. There’s already speculation that Fed Chair Jerome Powell may lean against a recent loosening in financial conditions that’s driven financial markets higher in past weeks.

“I guess we’ll soon see just how much appetite there is for Bitcoin in these rather unusual market conditions,” Craig Erlam, senior market analyst at Oanda, said in an email.

(Updates with comment from economist in sixth paragraph.)

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