Bitcoin has posted its biggest one-day drop in almost two months, amid warnings that novice investors could suffer heavy losses from speculating in crypto assets such as “meme coin” dogecoin.
Bitcoin tumbled more than 11% on Sunday, dropping from about $62,000 (£45,000) to $55,000 – its lowest level since the end of March. Last week, the cryptocurrency had hit fresh record highs at nearly $65,000.
Various reasons for the drop were cited, which followed a strong rally last week. Bitcoin had already weakened on Friday, after Turkey’s central bank banned the use of cryptocurrencies and crypto assets for purchases, citing the risks of possible “irreparable” losses.
Data website CoinMarketCap also reported the blackout in China’s Xinjiang region, which reportedly powers a lot of bitcoin mining, for the selloff.
There were also unsubstantiated reports that the US Treasury could be planning a crackdown on money laundering carried out through digital assets, pointed out Bloomberg.
Despite the decline, bitcoin was still up over 90% for the year, and almost five times higher than last October.
Bitcoin’s drop came as dogecoin – originally created as a joke – also fell back from its latest peak, after a remarkable surge this year.
Dogecoin has gained more than 6,000% since the start of 2021, from $0.0046 to about $0.30 on Sunday, having briefly hit $0.43 on Friday.
Dogecoin was inspired by the popular Doge meme, of a Shiba Inu looking sideways at the camera with raised eyebrows. Interest in the coin has been bolstered by influencial figures such as the Tesla founder, Elon Musk, who has tweeted several dogecoin memes.
Fans of dogecoin have been pushing for its price to reach $1. Dogecoin’s rise is particularly notable as it was created to satirise the growth of altcoins by making the doge internet meme into a cryptocurrency.
There is no cap to its supply, unlike bitcoin, which has a hardwired limit of about 21m coins.
Nigel Green, the chief executive and founder of the deVere Group financial consultancy, compared dogecoin’s rally to the GameStop mania that gripped markets in January, when retail investors organised on Reddit launched a short squeeze on hedge funds.
Q&A
What is ‘shorting’ or the short-selling of shares?
The conventional way to make money from shares is to buy at a low price then sell at a high price. It is called going long. Shorting is the opposite: buying high and selling low.
The approach of hedge funds is to target a share they believe is heading for a fall. But the only way to make a profit is by not really owning those shares in the first place, rather “borrowing” them. Typically, the hedge fund borrows them, at a small fee, from a pension fund that is holding them for the long term.
The investor (speculator is probably a better word) borrows, say, 10,000 BP shares and promises to return them at a fixed time – let’s say in a month. The speculator instantly sells the BP shares at the going market price – say 500p, giving them £50,000.
In a month’s time, when they have to return the shares to the pension fund, the shares have fallen to, say, 400p. So the speculator goes into the market, buys 10,000 shares for £40,000 and hands them back, making a profit of £10,000 along the way. But if the shares have risen to 600p, they will make a loss of £10,000.
The reality is rather more sophisticated than this – speculators rarely take actual delivery of shares, and use other methods such as CFDs (contracts for difference) and short ETFs (exchange traded funds) – but the principle is the same.
In January 2021, the struggling Texas-based video game store chain GameStop became the focal point of a battle between an army of small investors – using online chatrooms such as Reddit’s WallStreetBets – who piled into the shares, driving them sky-high, and Wall Street hedge funds, which had been shorting the stock and made big losses. Other stocks and silver were also caught up in the trading frenzy.
Patrick Collinson and Julia Kollewe
“In the same way that the GameStop frenzy was pitched as a battle-play of ‘Wall Street versus the little guy’, dogecoin is being pitched as a battle-play against the well-established crypto giants like bitcoin,” said Green.
“We can expect many novice retail investors – who may not have the financial resilience needed – to get burned in the dogecoin frenzy, in the same way they did with the GameStop one,” Green added.
Demand for dogecoin briefly overwhelmed the crypto trading system at Robinhood, an online trading app, last Friday.
Compound Capital Advisors’ Charlie Bilello pointed out that, following Sunday’s falls, there were still almost 100 crypto assets with a combined value of more than $1bn. Bitcoin hit a “market capitalisation” of $1tn last week.
Green added that traders should resist the “hysteria” driven by social media and look at the fundamentals of the different cryptocurrencies.
“It’s very hard to compare dogecoin with the likes of bitcoin, which runs on groundbreaking tech and has a limited supply giving it scarcity value, amongst other valuable attributes; and ethereum, which is solving real-world issues and providing in-demand business solutions. For these reasons, amongst others, they are attracting huge institutional investment,” Green said.