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Bitcoin's (BTC) intensifying sell-off that began last week after Tesla (TSLA) CEO Elon Musk changed his tune on the digital currency has engulfed other cryptocurrencies, as Dogecoin (DOGE), Litecoin (LTC) and Ethereum (ETH) all fell sharply on Wednesday morning.
The current plunge in crypto prices — which analysts attributed to extenuating factors such as China's decision to more tightly regulate cryptocurrencies, and a market that's beginning to look overly-speculative — represent a sharp reversal of fortune in a market enthusiastically embraced by retail investors and an increasing number of big banks.
Bitcoin languished near $36,000 in a volatile session, hitting its weakest since Jan. 27, and has shed about half its value since hitting an all-time high above $64,000. The swoon coincided with big moves lower on Wall Street and infected major crypto trading platforms like Coinbase and Binance, where the dramatic price swings disrupted order flow.
A steady drift lower that began weeks ago picked up speed after last week, when Musk announced that Tesla would stop accepting it for car purchases — even though the company continues to hold the digital coin on its books.
Wednesday's moves have analysts wondering whether a broad-based retreat from risk-sensitive assets is a harbinger of something bigger.
"I think the carnage is more because there's been so much more adoption, especially by the retail world," Liz Ann Sonders, Charles Schwab's chief investment strategist, told Yahoo Finance Live on Wednesday (video above). "The question is: How big of a hit? Really what I think is going on is this is just the next microbubble... to get pricked."
The cryptocurrency crash appeared indicative of a broader move away from risk-sensitive assets that benefited traditional safe-havens like Gold (GC=F) and Treasury debt. Bullion rallied sharply in early trading, consistent with what JPMorgan Chase recently noted was a rotation of money away from Bitcoin and into gold.
In a research note on Tuesday, the bank cited a "steady deterioration" across Bitcoin-based derivatives that only recently turned completely negative.
"What is striking is that the recent outflows from bitcoin funds have been accompanied by inflows into gold ETFs [exchange-traded funds] in a reversal of the last quarter of 2020 and the beginning of this year," JPMorgan's analysts wrote.
"To us, this suggests that institutional investors appear to be shifting away from bitcoin and back into traditional gold reversing the trend of the previous two quarters," the bank stated, though the exact reasoning was unclear.
Still, JPMorgan posited that investors could be "fleeing bitcoin as they see its previous two quarter uptrend ending and thus seek the stability of traditional gold away from the rapid downshifting of digital gold. Or they perhaps view the current bitcoin price as too high relative to gold and thus do the opposite of what they did in the previous two quarters ... and buy gold."
The 'chaos inducing' Musk factor
The sell-off also suggested the convergence of several trends: The cooling of a white-hot market, growing fears that the post-COVID rally could be running out of steam, and the after-effects of Musk's walking back his support for Bitcoin.
The billionaire's tempering of his formerly full-throated support for Bitcoin took cryptocurrency enthusiasts by surprise and aroused the ire of his backers in the retail investing community. Anthony Pompliano, a prolific Twitter user who's among the most vocal backers of crypto investing, has recently lashed out at Musk's "chaos-inducing" shifts that have "kicked the hornet's nest" of retail buyers.
"Elon Musk was quickly accepted into the bitcoin community with open arms weeks ago. He will be encouraged to leave just as quickly if he keeps acting foolish," Pompliano wrote this week in his daily newsletter.
"The thing that people don’t realize is that true bitcoiners don’t care who you are, what school you went to, how much money you have, or who your parents were. Either you understand bitcoin and are here to further the assets’ ascension to global adoption….or you don’t," the investor added.
Meanwhile, some of the crypto bearishness has also ricocheted on Tesla's stock, which has now seen $300 billion worth of market capitalization wiped out since January.
Roth Capital analyst Craig Irwin told Yahoo Finance this week that investor sentiment surrounding the electric car maker has curdled in recent days — in large part because of the billionaire’s polarizing statements of Bitcoin.
Citing Musk's "flip-flopping" on crypto, Irwin said that small investors are more reactive to the CEO's dilettante tendencies rather than company fundamentals.
“Operationally, I don’t question things but sentiment-wise, if Musk continues this prevarication, sort of jumping between one extreme to another around things that his retail base really care about, that will erode his credibility and push people to other companies," Irwin added.
Musk, for his part, suggested on Wednesday that Tesla would continue to hold cryptocurrency when he tweeted that the electric car company has diamond hands.
Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
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