Bitcoin on thin ice after sinking in flight from risk

By Rae Wee and Vidya Ranganathan

SINGAPORE/LONDON (Reuters) -Bitcoin dropped to a seven-month low on Friday, closing in on the $80,000 level below which some analysts say much heavier losses are likely for the world's largest cryptocurrency.

Bitcoin fell to $80,553, and ether hit a four-month low, as cryptocurrencies led a broad flight from riskier assets, spurred by investor worries over lofty tech valuations and uncertainty over near-term U.S. interest rate cuts.

    Cryptocurrencies are often viewed as a barometer of risk appetite and their slide highlights how fragile the mood in markets has turned in recent days, with high-flying artificial intelligence stocks tumbling and volatility spiking.

Bitcoin is down 12% for the week. Its slide follows a stellar run this year that propelled it to a record high above $120,000 in October, buoyed by favourable regulatory changes towards crypto assets globally.

But analysts say the market remains scarred by a record single-day slump last month that saw more than $19 billion of positions liquidated. 

As it plunged through $100,000 last week and headed for $80,000 on Friday, some analysts said bitcoin was reaching levels that corporate and institutional investors on average paid for their tokens, and where they might have to sell to prevent losses.

Bitcoin has erased all its year-to-date gains and is now down 12% for the year, while ether has lost close to 19%.

"If it's telling a story about risk sentiment as a whole, then things could start to get really, really ugly, and that's the concern now," Tony Sycamore, a market analyst at IG, said of the fall in bitcoin.

CRYPTO TREASURIES

The plunge on Friday will compound problems for so-called crypto treasury companies, which have been big buyers of bitcoin and other cryptocurrencies this year.

These companies hold the crypto on their balance sheets in the hope the price rises. Standard Chartered has estimated that a drop below $90,000 for bitcoin could leave half of these companies' holdings "underwater" - a term which typically refers to holding assets worth less than what was paid for them. 

Analysts say the companies could be forced to raise new funds or sell down their crypto holdings, putting further downward pressure on prices.

Listed companies collectively hold 4% of all the bitcoin in circulation, and 3.1% of ether, Standard Chartered estimates.

"The procyclical nature of bitcoin treasury companies is fully obvious now, if it wasn’t obvious six months ago," Brent Donnelly, president at analytics firm Spectra Markets, said in a note.

"They buy high and now some of them are selling low."

Citi analyst Alex Saunders said $80,000 would be an important level as it is around the average level of bitcoin holdings in exchange-traded funds.

About $1.2 trillion has been wiped off the market value of all cryptocurrencies in the past six weeks, according to market tracker CoinGecko. 

Shares in the bitcoin buyers soared earlier this year but have fallen sharply in recent months. Strategy, the biggest of the treasury firms, has seen its shares tank 61% since a July peak, leaving them down nearly 40% year-to-date.

JP Morgan said in a note this week that Strategy could be excluded from some MSCI equity indexes, which could spark forced selling by funds that track them.

Japanese peer Metaplanet has tumbled about 80% from a June peak.  

Donnelly notes that bitcoin selloffs in 2018 and 2022 saw prices drop around 75% to 80%, which if repeated could see a plunge to as low as $25,000.

"I am not saying we are in crypto winter. Just offering a reminder that 75%/80% drawdowns have been part of the game in bitcoin," he wrote.

(Reporting by Rae Wee, Niket Nishant and Vidya Ranganathan. Editing by Kevin Buckland and Mark Potter)