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Cryptocurrencies plummet into dreaded 'death cross' phase

7 minutes to read
Photo / 123rf

Photo / 123rf

news.com.au

As if things weren't bad enough for crypto investors today, Bitcoin has hit a sinister-sounding new stage in its cycle — the dreaded death cross.

This morning investors woke up to a world of hurt as major currencies crashed hard after China swept in yesterday to shut down a number of "gigantic bitcoin mining operations".

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The price of bitcoin sank to as low as US$32,309. The unit has taken a severe hit in recent weeks, having hit a record near US$65,000 in April, partly because of Beijing's crackdown.

Other cryptocurrencies have been hit even harder. As of this morning Ethereum is down 13.44 per cent and XRP is down 11.47 per cent, while Dogecoin has taken a 28.45 per cent hit.

Crypto investors will be the first to point out that crashes like this are bound to happen fairly regularly in this famously volatile market, after all we've seen several this year already.

Bitcoin has plunged through a dreaded death cross. Photo / Rekt CapitalSource
Bitcoin has plunged through a dreaded death cross. Photo / Rekt CapitalSource

They'll also tell you that the market will pick back up pretty quickly too and the long-term trend is positive, but some analysts have suggested this latest crash is more sinister.

It was only a few weeks ago that they warned that the world's biggest cryptocurrency Bitcoin was plunging towards a "death cross" – a technical pattern that could lead to another major sell-off of the coin. The opposite pattern is known as a "golden cross".

After last night's chaos, several analysts say the death cross has already formed. It means Bitcoin's average price over the last 50 days fell below that of its 200-day moving average.

This is not a good sign for the entire market, as death crosses have often been followed by massive crashes. Notable death cross events in other markets include the Wall Street Crash of 1929 and the 2008 Financial Crisis.

Death cross has been reached

Cryptocurrency trader and analyst, Rekt Capital, which is followed by more than 165,000 people on Twitter, previously warned the potentially catastrophic event for big-time crypto investors could happen by the middle of this month if bitcoin didn't increase its price.

Once the "death cross" hits, they said the digital coin could tumble by as much as US$18,000. The coin is currently worth US$32,778 – meaning its value could be halved from what it was just a few weeks ago.

The analyst said there have been similar "death cross" patterns in the market in previous years which have seen cryptos drop by eye-watering amounts.

In 2013, bitcoin dropped 73 per cent pre-death cross and an extra 70 per cent post-death cross.

In 2017, they said it dropped 70 per cent pre-death cross and an extra 65 per cent post-death cross.

While in 2019 they said it dropped 53 per cent pre-death cross and an extra 55 per cent post-death cross.

This morning, Rekt tweeted saying the death cross has "happened recently" and it has already led to some "deadly downsides" so far.

However, while analysts agree the death cross has formed this week some say it might not be as bad for investors as previous years.

That's because the 200-day moving average is still rising, meaning it could still climb to form a golden cross, like the currency did in March 2020.

"When it (the moving average) starts declining, that will be more compelling," Matt Maley, chief market strategist for Miller Tabak + Co told Bloomberg.

China crackdown sends market into spiral

It's all because of China's massive crackdown on the emerging currencies which has entered a harsh new phase in the past week.

Business experts at Shelly Palmer said the crackdown was announced weeks ago, but now it has come into effect with a bunch of "gigantic Chinese bitcoin mining operations" being shut down.

"This sudden drop in worldwide mining capability slowed transaction times from the algorithmically-set 10 minutes per block to more than 12 minutes per block, signalling to the market that the crackdown was real," they said in a note.

"This past weekend, even more Chinese miners went offline. This is no longer lip service or political theatre; China is full-on anti-crypto."

Yesterday, the superpower moved in to shut down major mines — computer hubs where the coins are created — in a key southwestern province.

Overnight, Beijing went hard again. According to the Global Times, China's central bank held talks with a number of Chinese banks and payment institutions about cryptocurrency trading speculation, asking them to screen the capital accounts of cryptocurrency exchanges and over-the-counter dealers and cut relevant payment links.

In a statement, the People's Bank of China (PBC) reiterated that no banks or banking institutions are allowed to provide products or services like registration, transactions or accounts for individuals who engage in cryptocurrency trading.

This has all been a nightmare for investors around the world.

Prices take a hammering

The price of bitcoin sank to as low as US$32,309. The unit has taken a severe hit in recent weeks, having hit a record near US$65,000 in April, partly because of Beijing's crackdown.

The notice reportedly instructed power companies to stop supplying electricity to all cryptocurrency mines by Sunday.

It vowed a "complete clean-up" and ordered local governments to carry out a "dragnet-style investigation" to find and shut down suspected crypto mines.

The province represents one of the largest bases for mining in the country. A former cryptocurrency miner told AFP they had "closed everything" in line with the requirements in recent days.

"There have been working groups coming to check … making sure we shut down operations and removed the machines," he said.

Sichuan, a mountainous region in southwest China, is home to a large number of cryptocurrency mines, which require a colossal amount of energy supplied by the province's cheap and abundant hydropower.

According to a report in the state tabloid the Global Times, the closure of mines in the province has resulted in the shutting down of more than 90 per cent of the country's bitcoin mining capacity.

On Monday, China's central bank added that it recently summoned banks and payment institutions — including the Industrial and Commercial Bank of China, Agricultural Bank of China and AliPay (China) Internet Technology — over providing services for virtual currency transactions and speculation.

The People's Bank of China said virtual currency transaction activities "disrupt the normal economic and financial order and breed risks of illegal cross-border asset transfers", adding that institutions must cut off links facilitating them.

Beijing has turned the screw on cryptocurrency miners to stamp out financial risks from speculation, although environmental concerns about the gas-guzzling mines is also a factor.

Chinese media reported that electricity supply to all crypto mines across the province was stopped at midnight Sunday, as the topic trended on social media.

Sichuan is China's second most intensive mining region after Xinjiang in the country's northwest, according to Cambridge University's Bitcoin Electricity Consumption Index.

All crypto mines in the sparsely populated but coal- and hydropower-rich regions of Inner Mongolia and Qinghai were also ordered to shut down in recent months, with citizens encouraged to report illegal mines.

Last month, the value of bitcoin dived after three Chinese financial industry bodies reasserted a ban on financial institutions from offering cryptocurrency services, warning against risky speculation by traders.

China is in the midst of a wide-ranging regulatory crackdown on its fintech sector, whose biggest players — including Alibaba and Tencent — have been hit with big fines after being found guilty of monopolistic practices.