(Bloomberg) -- A sharp weekend selloff in crypto led by a slump in smaller digital tokens set off a fresh wave of anxiety among investors, following a week in which a crackdown by the US Securities and Exchange Commission on the sector gained significant pace.
Altcoins including Cardano’s ADA tumbled as much as 25% on Saturday before paring a sliver of the decline, while tokens including Solana’s SOL, Polygon’s MATIC and Avalanche’s AVAX posted double-digit percentage drops. Bitcoin, the largest digital asset, was down almost 3% as of 4:15 p.m. in New York. Second-ranked Ether earlier shed more than 6% to hit its lowest level since late March.
The crypto market is notorious for big swings during weekends, when activity is typically thinner and even small trades can make an impact. This time around, investors were already on edge after the SEC launched lawsuits earlier in the week against market leaders Binance Holdings Ltd. and Coinbase Global Inc., and flagged a throng of altcoins as unregistered securities, including SOL, MATIC and ADA.
“Altcoins have been in the spotlight” ever since the SEC categorized some of these tokens as securities in recent lawsuits, said Gordon Grant, co-head of trading at Genesis, in an interview Saturday. “Coming into this weekend, as we got to that witching-hour time, these alts suddenly came under fire.”
Jitters were compounded by speculation over a rumor that a fund sold its entire holdings of such tokens. An image was circulated on Twitter showing a fake news article covering the liquidation, though market analysts said there was little reason to believe the rumor was true. Further speculation of selling pressure around Robinhood Markets Inc.’s decision Friday to drop certain altcoins from its platform also fed the negative sentiment.
Noelle Acheson, former head of market insights at Genesis Global Trading Inc., said there may be another cause for the price drop, such as a large holder or fund exiting its positions or an attempt to drive prices lower to cover shorts.
“Early Saturday morning UTC time is not a good time to exit unless you want to really move the price,” Acheson wrote in her newsletter on Saturday. “Today’s move is not good news, and not just because of the lower prices. It reminds investors how thin the market currently is, and how prices could be manipulated.”
A designation as an unregistered security could make tokens harder to trade if exchanges shy away from listing them for fear of irking the SEC. Robinhood said Friday it will drop Solana’s SOL, Cardano’s ADA and Polygon’s MATIC from June 27.
“Regardless of if the physical tokens held by Robinhood have moved or not, the fact that at end of month the tokens will be sold if not moved sets in motion a very easy trade for folks to pre-position for,” Spencer Hallarn, derivatives trader at crypto investment firm GSR, said. “On top of that, there has been a general withdrawal of liquidity from the market as various folks have retrenched.”
The past week’s events featured a momentous few days of enforcement actions against the crypto industry in the US. The SEC accused Binance and its founder Changpeng “CZ” Zhao of mishandling customer funds, misleading investors and regulators, and breaking securities rules. Binance has called the SEC action “disappointing” and said that it intends to defend its platform “vigorously.”
Coinbase has disputed the SEC’s allegation that it’s running an illegal exchange and said it’s prepared to take the legal fight all the way to the Supreme Court. BNB, a cryptoasset which can be viewed as arbiter of sentiment toward its original creator Binance, declined more than 6% on Saturday to reach the lowest level since last July.
While US regulators view Bitcoin as a commodity, SEC Chair Gary Gensler has long said most other tokens are subject to the agency’s investor-protection laws and that trading platforms should register with the regulator.
But labeling specific tokens represents a tougher approach, part of a clampdown on digital assets this year following a rout in 2022 and a series of blowups, including the bankruptcy of the FTX exchange.
“US regulators have made it clear they want to rein in crypto within their borders,” Michael Safai, co-founder of London-based Dexterity Capital, wrote via a message on Saturday. “Investors need to be wary as more western players step away, leaving markets thin and subject to sudden volatility spikes.”
--With assistance from Muyao Shen.
(Updates with added commentary in third and final paragraphs.)
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