Bitcoin has suffered a sharp pullback from record highs.
The world’s biggest cryptocurrency fell to $66,885 in the early hours of Friday – down 9%.
Only yesterday, the digital asset had been touching an unprecedented price of $74,000.
It is difficult to pinpoint a single reason for Bitcoin’s sudden contraction, as several are at play.
For one, many crypto traders will be taking profits off the table after an extraordinary bull run that’s seen BTC surge by 175% over the past 12 months.
Another relates to wider uncertainty in the global economy, with higher-than-expected inflation in the US plunging hopes of interest rate cuts into doubt.
City Index analyst Matt Simpson explained: “Bitcoin has an established history of getting volatile and ruthless after hitting a record high.
“And not only did it recently hit a new high, but it looks like the Federal Reserve won’t be as dovish as traders had hoped.”
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In the past, Bitcoin has tended to operate in boom-and-bust cycles, with each peak proving to be markedly higher than the last.
This is partly driven by a rare event called “the halving”, which takes place every four years.
As the name suggests, halvings see the number of new Bitcoin entering the market permanently slashed by 50%.
This is next scheduled to take place in April, meaning just 450 BTC a day will be created.
Overall, Bitcoin’s maximum supply stands at 21 million – and enthusiasts argue this scarcity is what makes it so valuable.
Another new development this year is the approval of BTC exchange-traded funds in the US, which allow American investors to gain exposure to Bitcoin’s price without owning it directly.
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BlackRock’s Bitcoin ETF has led the charge. Pic: Reuters
BlackRock, the world’s largest asset manager, runs the biggest Bitcoin ETF – with $15.5bn (£12bn) flowing into this fund in a little over two months.
Similar products could soon be rolled out in the UK.
Politicians and regulators have long expressed concern about consumers investing in crypto because of how volatile it is.
The Bank of England’s default position is that investors should be prepared to lose everything.
Bitcoin has proven extremely divisive – and while critics dismiss it as a worthless, speculative asset, industry leaders argue that it represents the future of finance.
Such conflicting views also feed through into forecasts for Bitcoin’s price in the future.
Earlier this month, the US investment bank JPMorgan predicted BTC will fall to $42,000 in April – a 38% drop from current levels.
But prominent investors believe $100,000 is a realistic short-term target – while fund manager Cathie Wood has long maintained Bitcoin will hit $1m by 2030.
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