Global economy fears heap on the pain for bitcoin and crypto investors

Bitcoin fluctuated around the $20,000 mark last night after days of turmoil fuelled fears of a ‘crypto winter’ that could send shockwaves through the global economy.

The digital currency nose dived to $17,772 over the weekend as investors continued to rush to the exit.

With bitcoin down more than 30 per cent this month, and 70 per cent since its all-time high close to $70,000 in November, a slight recovery back towards $20,000 did little to settle nerves.

Sinking feeling: With bitcoin down 70% since its all-time high close to $70,000 in November, a slight recovery back towards $20,000 did little to settle nerves

Other cryptocurrencies have been caught up in the sell-off with ethereum down 70 per cent this year and dogecoin – which was set up as a joke before gaining a following after attracting the attention of Tesla founder Elon Musk – has fallen 90 per cent since its peak.

The fallout has been felt hard with many of the 2million-plus British investors holding crypto assets now sitting on heavy losses.

The rush into crypto was driven by ultra-low interest rates over recent years and central banks using quantitative easing to flood the markets with cheap money.

Aside from ‘loose’ financial conditions, they were also taken in by high profile celebrities who were paid to sell the currencies in online adverts – including Snoop Dogg, Matt Damon and Gwyneth Paltrow. 

Other admirers include Paris Hilton and Reese Witherspoon – as well as Musk himself. 

But panic has ripped through the crypto markets in recent days as fears about runaway inflation, higher interest rates, global recession and war in Ukraine paint the industry in a rather different light. 

Crypto lender Celsius Network last week stopped customer withdrawals as it teetered on the brink of collapse. 

As the chaos spread, crypto exchange Binance then blocked users from accessing their bitcoin holdings.

Enthusiast: Socialite Paris Hilton has promoted cryptocurrencies

Sentiment was made worse two days later when the US Federal Reserve raised its main interest rate by three-quarters of a percentage point – the biggest increase since 1994.

The Bank of England then followed, increasing rates by a quarter of a percentage point to 1.25 per cent, its fifth consecutive rise. The Bank also warned that inflation could hit 11 per cent this year.

Further panic spread as central bankers on both sides of the Atlantic signalled they will keep hiking rates aggressively this year to tame inflation.

Following the steep falls, analysts were quick to warn that investors should be braced for a long hard ‘crypto winter’.

Neil Wilson, an analyst at Markets.com, said: ‘All anyone is talking about is the chill winds blowing from the crypto winter.

‘Rising interest rates, an acute risk-off mood across markets, a thinning of liquidity is all to blame – in short, the end of free money from the Fed means the artificial pump that created these assets is no longer working.’

Bitcoin’s popularity is even greater in the US where it has achieved a cult-like status with 16 per cent of Americans saying they have invested in or used it, up from 1 per cent in 2015.

Its meteoric rise has come despite warnings from authorities and leading investment bankers who repeatedly told investors that crypto had no value. 

Wall Street veteran and JP Morgan chief executive Jamie Dimon last May called bitcoin ‘worthless’.

Hedge funds and corporate companies are also exposed to crypto. Coinbase, America’s biggest cryptocurrency exchange, has announced plans to sack 1,100 staff while Babel Finance, another cryptocurrency company, froze all accounts due to ‘unusual liquidity pressures’.

Bad call: Reese Witherspoon, left, and Tesla billionaire Elon Musk, right, have also promoted cryptocurrencies

Three Arrows Capital failed to meet demands from lenders to stump up extra funds after its digital currency bets turned sour, tipping the prominent crypto hedge fund into a crisis.

But the most high profile firm to suffer is electric car maker Tesla. In December, it revealed it was holding 43,200 bitcoins, worth nearly £1.6billion.

They are worth just a fraction of that today.

Despite the loss, Musk has shown no remorse, tweeting his support for the crypto industry and dogecoin on Sunday.

While for many investors crypto has been nothing more than a ‘dabble’, analysts are warning the collapse of the industry could have serious consequences for the financial system, hitting mainstream assets on Wall Street and in London.

In 2008 the prices of credit products built out of sub-prime US mortgages went down, triggering a global banking crisis and recession and the loss of millions of jobs worldwide.

Similarly, crypto has worked its way into the real financial system, with household name asset managers like Invesco and Fidelity offering a number of exchange traded products.

Already the fall in crypto markets has coincided with a slide in equities as US stocks suffered their biggest weekly percentage decline in two years last week.

Malcolm Freeman, a director at broker Kingdom Futures, said: ‘Investors are getting wiped out and the question is: Are those investors also involved in equities?’

He said if these investors ‘run for the exit’ and dump their shares, the ripples will be felt across other markets.

So while contagion to the financial system has not fully materialised, fears over the impact of a harsh crypto winter are mounting.

This post first appeared on Dailymail.co.uk