Bitcoin's weekend plunge points to the growing influence of Wall Street traders

Bitcoin's rocky weekend marked one of the first times that a storm in traditional financial assets caused major waves in cryptocurrencies, underscoring how big investors are playing an increasing role in digital asset markets.

The price of the largest cryptocurrency by market value fell to $42,222 in just 60 minutes in the early hours of London morning on Saturday, according to FT Wilshire's Blended Bitcoin Price Index, which tracks trading on leading crypto exchanges.

The flash 20 percent plunge came just hours after the end of a volatile week on Wall Street, in which stocks and bonds fluctuated sharply in response to possible changes in monetary policy and the spread of the new coronavirus strain.

Crypto's weekend shock suggests that this normally somewhat separate market is becoming more closely tied to these traditional assets, especially now that large institutional investors are more involved.

“This started as a risk-off move in traditional macro circles [which] triggered some crypto liquidations,” said David Fauchier, portfolio manager at digital assets specialist Nickel Digital.

Bets worth more than 2.5 billion than Binance.

On crypto futures exchanges, traders who have increased their bets by borrowing are typically wiped out when the price of a digital token reaches a certain threshold, called the liquidation price.

Lim added that the rapid decline also affected positions worth over $5 billion.

Bitcoin prices have risen more than 500 percent in the past two years, with some investors - mostly amateur retail investors but also some professionals - attracted by the theory that the returns may be uncorrelated with other assets. But the more hedge funds and other large investors get involved, the closer the connections to other markets become.

Many professional investors were also keen to convert paper profits into real returns before the end of this year, which contributed to the selloff, said Jan Stromme, founder of crypto trading firm Alphaplate.

“I expect to see increasing correlation between risk sentiment in traditional markets and [digital ones],” Fauchier added.

The coronavirus resurgence, weak jobs data and comments from Federal Reserve Chairman Jay Powell pointing to an sooner-than-expected rise in interest rates deterred investors from rethinking their bets and moving away from assets that thrive on strong global growth.

“[Bitcoin’s sell-off gathered pace] as general market unrest escalated,” Lim said. That’s a reminder that while Bitcoin is considered one of the safer cryptocurrencies compared to even more volatile bets like Dogecoin, it is still vulnerable in moments of market jitters.

Prices did not fully recover on Monday and Bitcoin traded at $48,900.

Professional investors who dip a toe into crypto generally lack the almost religious belief in digital assets that is common among the hardcore fanbase of retail investors who insist on sticking with digital coins no matter what.

“We have to remember that it is just another risky asset that will rally when the world is good and sell off when it is not,” said Beat Nussbaumer, a Swiss currency trader and portfolio manager. Early retail buyers of crypto had welcomed institutional investors into the market, hoping they would drive up the price, but the weekend selloff suggested new vulnerabilities were also being introduced, he said.