Bitcoin crashes for the fourth day in a row as bubble seemingly deflates

PUBLISHED : Saturday, 23 December, 2017, 1:42am
UPDATED : Saturday, 23 December, 2017, 1:42am

Bitcoin’s plunge extended to almost 30 per cent on Friday as the frenzy surrounding digital currencies faced one of its biggest tests yet.

The world’s largest cryptocurrency approached US$10,000 as this week’s sell-off entered a fourth day with increasing momentum. It touched a record high at US$19,511 on Monday. Other cryptocurrencies also tumbled, ethereum dropped as much as 36 per cent and litecoin slumped as much as 43 per cent.

Bitcoin dropped to as low as US$10,776, before recovering to US$12,768 in New York. It last traded below US$10, 000 on December 1, when the US Commodity Futures Trading Commission (CFTC) agreed to allow trading in bitcoin futures. For the week, the decline is as much as 39 per cent. The price of the digital coin had more than doubled in the prior three weeks.

This week’s losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, which have rapidly entered the mainstream in recent weeks.

Bears cast doubt on the value of the virtual assets, with UBS Group AG this week calling bitcoin the “biggest speculative bubble in history.” Bulls argue the technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current sell-off.

“The sharks are beginning to circle here, and the futures markets may give them a venue to strike,” said Ross Norman, chief executive officer of London-based bullion dealer Sharps Pixley Ltd, which offers gold in exchange for bitcoin. “Bitcoin’s been heavily driven by retail investors, but there’ll be some aggressive funds looking for the right opportunity to hammer this thing lower.”

Traders who bought the currency on futures exchanges using collateral may start facing margin calls following the price decline. Two venues launched products in recent weeks that required hefty security, with CBOE needing 44 per cent to clear contracts, and the CME 47 per cent. Brokers set safety nets even higher.

“There’s no doubt people who got in on margin will face some pressure here,” Norman said by phone from London. “The volumes weren’t huge, so it won’t be a major price driver, but for those caught on the wrong side it will hurt.”

Many of the recent news stories and market moves connected to cryptocurrencies appear to carry hallmarks of the mania phase of a bubble.

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