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Key takeaways

  • The People’s Bank of China has issued a warning against illegal activities involving cryptocurrencies, sending the crypto market tumbling.
  • High levels of leverage on bitcoin exchanges are amplifying price swings and increasing the likelihood of future liquidations.
  • The bitcoin price has become increasingly correlated with stock market indices, partly due to the volatile behaviour of retail investors.

Cryptocurrency prices have fallen sharply. On Saturday, the People’s Bank of China issued a statement warning against illegal activities related to digital currencies, which weighed on Hong Kong–listed companies involved in digital assets.

Leverage

The pullback is part of a broader risk-off mood in markets at the start of the month. Financial experts partly attribute today’s reversal to a 400 million dollar (around 343.6 million euro) liquidation in the stock market. They point to the high levels of leverage on bitcoin exchanges, which in some cases go up to 200 times. Because leverage in cryptocurrency perpetual futures is much higher than in ETFs, further liquidations can be expected if the bitcoin price continues to stagnate.

Retail investors

The pullback comes on the heels of a sharp sell-off in October, which also hit the stock market. Experts see a growing correlation between bitcoin and certain equity indices, such as the Nasdaq. The concern is that this volatility is mainly driven by retail investors, who often react differently than institutional investors. The decentralised structure of crypto exchanges and the opacity of the asset class add yet another layer of complexity.

Macroeconomic uncertainties, including speculation about a possible interest rate cut in the United States, continue to influence investor behaviour. In addition, concerns about the overvaluation of stocks linked to artificial intelligence (AI) are contributing to market volatility in November.

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