Bitcoin and Ether Tumble as Regulatory Storm Clouds Gather

Bitcoin, Ether, and other cryptocurrencies tumbled on Friday as threats of a new regulatory crackdown in the U.S. loomed over the digital asset market, threatening to undo gains from a rally that has carried cryptos higher so far this year.

The price of Bitcoin has fallen 3.9% over the past 24 hours to below $21,681.03 after trading near $23,000 on Thursday before news of scrutiny on crypto platforms from the Securities and Exchange Commission pushed prices lower. The largest digital asset has hovered around $23,000 for much of the past few weeks—a high point at which it had consolidated following a 40% rally to start 2023—and now looks vulnerable to a correction. Ether, the second-largest crypto that is in the spotlight amid the SEC’s actions, was weaker, dropping 6% to below $1,550.

“After showing solid resilience over the past few weeks, Bitcoin finally appears to have entered into a correction phase after falling almost 5% on Thursday,” said Craig Erlam, an analyst at broker Oanda. “It was never just going to go from strength to strength and this correction will enable us to see just how quickly money pours back in. It should be an interesting couple of weeks.”

Digital assets have largely traded in tandem with stocks in recent weeks, moving higher with the Dow Jones Industrial Average and S&P 500 amid optimism over the macro outlook for inflation and interest rates, which impact both asset classes. Issues endogenous to crypto are now taking control of market sentiment and spurring a selloff as traders look to multiple regulatory threats facing digital assets in the U.S.—the latest risk to cryptos amid a brutal bear market.

Crypto platform Kraken on Thursday agreed to pay a $30 million fine to the SEC and end its “staking” service for U.S. customers, seemingly confirming fears raised by the CEO of Coinbase Global (ticker: COIN) that the agency was eyeing a ban on staking.

Staking involves traders locking up tokens—like Ether—as collateral in a process that both helps a blockchain network, such as Ethereum, operate and earns investors a yield. It stands at the heart of many blockchains other than Bitcoin’s and is a factor attracting investors to the space. Therefore, a ban on U.S. retail participation would be a blow to the wider adoption of Ethereum and similar networks. A U.S. staking ban also bodes ill for Coinbase, which facilitates staking in a service for which it charges significant fees.

For some market observers, moves by the SEC against digital asset businesses in the U.S. look to be reaping what was sowed when crypto exchange FTX collapsed last November amid allegations of fraud at historic proportions.

The failure of FTX, which sought Chapter 11 bankruptcy protection under new management, rattled crypto markets and sparked newfound scrutiny from regulators and lawmakers—which now looks to be playing out with an SEC crackdown.

“It’s unsurprising to see more stringent U.S. regulatory action in the wake of the FTX collapse and related collateral pressure on high profile crypto funds and platforms,” Mark Haefele, the chief investment officer at UBS Global Wealth Management, wrote in a Friday note.

But the latest developments don’t mean it’s all doom and gloom for crypto. UBS, for its part, remains upbeat on blockchain technology and the prospect of playing the trend by owning shares in companies exposed to the sector.

“We do think the technology which underlies digital assets remains promising,” Haefele said. “Investors may position for this potential via select distributed ledger technology-related enablers and platforms, without having to take on the high level of volatility and the regulatory risks attached to Bitcoin and rival cryptos.”

Smaller cryptos, or altcoins, also traded deep in the red on Friday, with Cardano down 5.9% and Polygon losing 1.4%. Memecoins showed much of the same, with Dogecoin dropping 5.8% and Shiba Inu shedding 4.6%.