Bitcoin Slides Below $40,000 After China's New Crypto Ban

(Reuters) - Bitcoin tumbled below the $40,000 mark on Wednesday to a 3-1/2 month low as selling in digital coins intensified after China banned financial and payment institutions from providing cryptocurrency services.

Bitcoin, the biggest and best-known cryptocurrency, had already been under pressure from a series of tweets from Tesla boss Elon Musk, but the news from China sent it as low as $36,250, a 15 per cent drop in the trading session.

The cryptocurrency has tumbled 40 per cent from a record high of $64,895 hit on April 14. It is also heading for its first monthly decline since November 2018.

Bitcoin's decline whacked other crypto assets, with Ether, the coin linked to the ethereum blockchain network, shedding as much as 28 per cent on Wednesday to $2,426. It brings losses in the week since it hit a record high on May 12 to 40 per cent.

Meme-based dogecoin also tumbled -- losing nearly 30 per cent at one point, according to market tracker Coingecko.

Shares in the crypto exchange Coinbase dropped 5 per cent in pre-market trading. Coinbase's share price has nearly halved from the peak hit on the day of its direct listing in April.

Cryptocurrency price declines last week were sparked by Musk's reversal on Tesla accepting bitcoin as payment. His subsequent tweets caused further confusion over whether the carmaker had shed its holdings of the coin.

China's announcement on Tuesday banning financial institutions and payment companies from providing services related to cryptocurrency transactions exacerbated selling. China also warned investors against speculative crypto trading.

"The crypto markets are currently processing a cascade of news that fuel the bear case for price development," said Ulrik Lykke, executive director at crypto hedge fund ARK36.

"News like this can get a lot of traction and easily stir market sentiment but they often prove of little significance in the long term," he added.

Some cryptowatchers, however, predicted more losses ahead, noting the fall below $40,000 represented a breach of a key technical barrier that could trigger more selling.

A "widespread deleveraging" was sweeping through cryptocurrency markets, said Saxo Bank's chief investment officer, Steen Jakobsen, calling the selloff deeper and more widespread than earlier episodes.

INFLATION HEDGE?

Investors may also be exiting bitcoin for gold, analysts at JPMorgan said, citing positioning data compiled on basis of open interest in CME bitcoin futures contracts.

This shows "the steepest and more sustained liquidation" in bitcoin futures since last October, they told clients, adding that it pointed to "continued retrenchment by institutional investors".

The crypto asset selloff at a time when inflation fears are rising hurts the idea of the asset class as an inflation hedge.

Instead, more traditional hedges have been gaining ground, with gold up almost 6 per cent this month.

The recent selloff in bitcoin and other digital currencies has sent market capitalisation of all cryptocurrencies to $1.7 trillion, down from the $2.5 trillion record hit earlier this month.