An abrupt surge in bitcoin Tuesday sent the world’s most popular cryptocurrency to the highest level since November, jolting the $160-billion market for digital assets after three months of calm. And it’s not clear why.
Traders struggled to pinpoint reasons for the rally, though some noted a flood of fresh interest after bitcoin breached the $4,200 level. The cryptocurrency briefly topped $5,000, and the value of digital assets tracked by CoinMarketCap jumped by about $17 billion in less than an hour.
Sudden swings in bitcoin are nothing new, but price moves had been relatively subdued this year — after last year’s 74% crash, investors have been rethinking whether the currency will reach mainstream adoption. Market participants say big buy orders in bitcoin can often lead to outsize moves, in part because volume is spread across dozens of venues.
Volatility can also be exacerbated by individual trend-following investors, as well as by “short covering” — that is, buying by traders who had previously borrowed the currency and sold it, betting on falling prices. As prices turn up, those short sellers can rush in to close out their bets.
“The bitcoin market and crypto market in general continues to be small relative to the rest of the markets — and emotional,” said Jehan Chu, managing partner at blockchain investment and advisory firm Kenetic Capital. “It’s still very much subject to waves of enthusiasm. I don’t think today is anything special.”
Shortly before 5 p.m. Pacific time, bitcoin was at $4,896.87 — up nearly 18% from a day earlier, according to CoinMarketCap. Rival coins ether, litecoin and bitcoin cash also jumped by double digits. Cryptocurrency-linked stocks including Remixpoint Inc. and CMC Markets also advanced.
George Harrap, chief executive of Bitspark, said he was putting “most things on pause” until the market settled down. His contacts in the bitcoin community have yet to identify a catalyst for the sudden jump.
“The reason why? Anybody’s guess at the moment,” Harrap said.
Among potential triggers discussed on trading desks and in social media: short covering by traders who had stop-loss orders around the $4,200 level, computer-driven trading and an April Fools’ Day story on a little-known online news site claiming that the U.S. Securities and Exchange Commission had approved bitcoin exchange-traded funds.
“Bitcoin is still primarily retail-led,” said Craig Erlam, senior market analyst at Oanda Corp. in London. “It’s still a relatively unsophisticated area of trading,” giving more credence to breaking the $4,200 level than an April Fools’ Day hoax.
The cryptocurrency’s susceptibility to wild price swings has made it popular among speculators, who are eager for a return to the glory days of 2017, when bitcoin surged more than 1,400%.
Yet extreme volatility is also a reason the virtual currency has failed to catch on as a global medium of exchange, as intended by its pseudonymous creator. Erratic moves have also deterred institutional investors, whose concerns about cryptocurrencies include uncertain regulation, exchange hacks and market manipulation.
A research report last month asserted that most of the trading volume on the world’s largest cryptocurrency exchanges was questionable. A separate report said trading was often inflated by unregulated platforms.
“Events such as today’s will probably be seen negatively, or viewed as this market doesn’t conform to the trading of traditional instruments,” said Dave Chapman, CEO of crypto exchange Anxone. “We have to realize that this asset class is only a decade old, and it only started getting mainstream attention five years ago.”