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Cryptocurrency recovery suffers setback after US new policy

By News Desk

Cryptocurrencies recovery have again suffered setback with more than 10% clipped from Bitcoin rally after United States Treasury Department called for new rules that would require large cryptocurrency transfers to be reported to the nation’s Internal Revenue Service.

The new policy proposal was coming barely 24 hours after a brutal sell-off on concerns over tighter regulation in China and unease over the extent of leveraged positions among investors sank the world’s biggest cryptocurrency to its lowest level since late January.

Reports of the Treasury Department’s proposal sliced into bitcoin’s gains on Thursday, leaving the cryptocurrency up 3% on the day after earlier jumping more than 10%. Thursday’s gains brought bitcoin back to near $40,000, or approximately where it traded in early February. Smaller rival ether was up 12% at $2,935 after its 28% tumble.

The rally in cryptocurrencies Thursday came after prominent backers such as Ark Invest’s (ARKK.P) Cathie Wood and carmaker Tesla’s (TSLA.O) Elon Musk indicated their support on Wednesday. Wood said in an interview that she was still sticking to her $500,000 forecast. Musk reiterated that Tesla was holding onto its bitcoin investments.

Reacting to the development, the Head of Research at brokerage Pepperstone in Melbourne, Chris Weston, said that it was “too early to say if the rebound we’ve seen off the lows in crypto has legs.”

“I question if we will get a chance to catch our breath or is there more volatility in store?” Weston pointed to how $9.13 billion of cryptocurrency positions had been liquidated across exchanges over 24 hours, and $532 billion in total volume transacted.

Wednesday’s declines in both digital assets were one of their biggest daily percentage moves in more than a year, with investors rushing to exit trades that until recently were outperforming traditional markets such as stocks and bonds. Also, Wednesday’s volatility fuelled record turnover. Data from CME showed volumes on bitcoin futures soared to 32,356 contracts, more than three times the average volumes for May.

While turnover on Thursday declined from the frenzied volumes seen overnight, May contracts still showed more than 6,000 contracts traded. Similar trends were observed on CME’s micro bitcoin futures where nearly 95,000 contracts were traded on Wednesday.

The catalyst was a statement by Chinese financial industry bodies banning the use of cryptocurrencies in payment and settlement. China also prohibited institutions from providing crypto-related products or exchange services between cryptocurrencies and the yuan or foreign currencies.

Reacting to the development, next-generation research analyst at Julius Baer, Alexander Ruchti, said that the ban from China could define the future digital banking across the world.

“A defining factor for China’s decision is also likely to be their strong push towards a central bank digital currency solution. The past week’s steep and rapid decline once more underpins how susceptible the segment is towards sentiment swings.”

Bitcoin had been under pressure after a series of tweets last week by Musk, a major cryptocurrency backer, chiefly his reversal on Tesla accepting bitcoin as payment. The slide forced some investors to close out leveraged positions in cryptocurrency derivatives, which caused prices to fall further, according to traders.

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