TOKYO -- Cryptocurrencies have injected greater volatility into global financial markets as these assets gain traction not just with retail investors but also among big institutional players like BlackRock.
This volatility was thrown into sharp relief Wednesday, when a rout in bitcoin, Ethereum and other digital money quickly spread into the stock market.
The crash came after China signaled a larger crackdown on cryptocurrencies amid concerns that the growing asset class could destabilize financial systems. The China Banking Association and other industry groups on Tuesday instructed financial institutions not to provide crypto-related services. They also warned retail investors against speculative trades involving cryptocurrencies.
Bitcoin plunged 30% at one point to nearly $30,000 Wednesday in the U.S., halving in value from a record high of $64,800 set just a month and a half prior, while Ethereum sank over 40%.
But the impact rippled beyond the crypto market. Shares in electric vehicle maker Tesla, which holds a substantial amount of bitcoin, fell over 5%. The Dow Jones Industrial Average temporarily dropped over 580 points. The currencies rebounded Thursday morning, with bitcoin topping $40,000 and Ethereum hovering around $2,900. Still, the incident highlighted the volatility associated with these assets.
Cryptocurrencies, which initially appealed mainly to retail investors, have gained in value as they reach a wider audience including financial institutions. BlackRock has said it now trades in bitcoin futures. Prominent investors like Stanley Druckenmiller and Paul Tudor Jones also are bullish on cryptocurrencies, spurring big hedge funds to embrace the assets.
Retail investors accounted for 35% of trading volume on Coinbase in the January-March quarter, the U.S.-based crypto exchange said, with institutional investors constituting the other 65%. By asset value, retail investors accounted for 45%, compared with 55% for institutional investors.
The sharp slide in cryptocurrencies pushed many institutional investors to dump other types of assets to adjust their portfolio allocations and risk exposure. Prices fell Wednesday for commodities like copper and crude oil futures, which recently experienced an influx of funds, as well as high-yield bonds.
Retail investors were spooked as well. Ark Innovation, an exchange-traded fund that took off in 2020, plunged Wednesday. The fund holds shares in Tesla as well as Coinbase and many other crypto-related businesses, and its drop prompted an even greater sell-off among its components.
The incident also shed light on the challenges that cryptocurrencies still face as a working asset. Key exchanges like Coinbase, Binance and bitFlyer experienced connection failures Wednesday amid a flood of sell orders, preventing potential trades from going through.
Cryptocurrencies have been hailed as a "free" asset beyond the control of central banks. But in reality, government and regulatory moves influence their value.
China, in particular, is bolstering restrictions on these assets as it prepares to formally launch the digital yuan. The regional government in Inner Mongolia is banning cryptocurrency mining facilities.
India is debating new restrictions on cryptocurrency, with critics calling for a blanket ban. And the U.S. Treasury looks to require cryptocurrency transfers of at least $10,000 to be reported to tax authorities.
Certain individuals also wield an outsize influence on the crypto market. Tesla CEO Elon Musk has long been a champion for the currencies, even dubbing himself the "Dogefather" after the meme-inspired Dogecoin in a recent tweet. But he announced May 12 that Tesla no longer would take payments in bitcoin due to the currency's energy-intensive mining process, triggering a plunge in its value.
Many market watchers expect the volatility to persist.
"Investors are being forced to face a turning point in virtual currencies and tech stocks, which have been symbolic of the excess liquidity in the market," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.