The two main digital currencies, bitcoin, and ether fell as much as 30 per cent and 45 per cent respectively
By Tommy Wilkes, Sujata Rao, and Gertrude Chavez-Dreyfuss
NEW YORK/LONDON (Reuters) -Cryptocurrencies that seemed to be defying gravity just weeks ago came back down to earth with a bump on Wednesday after a roller-coaster ride which could undermine their potential as mainstream investments.
The two main digital currencies, bitcoin, and ether fell as much as 30% and 45% respectively, but significantly pared losses after two of their biggest backers - Tesla Inc chief Elon Musk and Ark Invest's Chief Executive Cathie Wood - indicated their support for bitcoin.
While many analysts thought the explosion in crypto interest this year was not sustainable, the trigger for the shake-out was China's move on Tuesday to ban financial and payment institutions from providing cryptocurrency services. It also warned investors against speculative crypto trading.
At one point on Wednesday, nearly $1 trillion was wiped off the market capitalization of the entire crypto sector. In early afternoon trading, their market cap was $1.8 trillion, according to data tracker CoinGecko.com.
"It's not just a small segment of the world that is affected by cryptocurrencies; it's now mainstream," said Tom Plumb, portfolio manager of the Plumb Balanced Fund.
In other markets, a move into safe-haven U.S. Treasury securities initially knocked yields lower, although yields rose after the release of minutes of the Federal Reserve's latest meeting, while U.S. stock indexes logged losses.
"There's a lot of leverage embedded into crypto stocks so there will be a spillover effect into equity markets in the short term and there is also quite the inflation fear as the market thinks the Fed might have to hike rates abruptly if prices keep rising," said Thomas Hayes, chairman and managing member at hedge fund Great Hill Capital LLC.
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