Bitcoin slumped as much as 13 per cent on Thursday after surging to an all-time record in the previous session — a blow to the view that the latest rally is built on long-term foundations, but seen by some analysts as a short-term “correction”.
The exchange rate reached slightly less than $16,320 in morning trading in London, less than 24 hours after hitting a record high of $19,510.
Bitcoin has risen about 50 per cent in the past three months, and about 140 per cent this year, drawing comparisons with its previous boom in 2017. That was followed by a dramatic collapse over the following year from which the market struggled to recover.
Antoni Trenchev, co-founder of digital-asset specialist Nexo, attributed the sharp decline to traders taking profits after the record high, as well as predictions that more stringent regulations were in the offing in the US, which could make accessing cryptocurrencies more difficult.
But Mr Trenchev thinks it will be a temporary blip. “We’ve come a long way very fast and it’s natural to have a correction after such a rally,” he added. Bitcoin recovered some ground before diving again later in the London trading day, down 11 per cent by late afternoon at $16,780.
Bitcoin bulls say that in recent months, the cryptocurrency has attracted a growing number of professional investors, who are treating it more like a mainstream asset. Banking group UBS said one of the top questions asked by its clients in a recent survey was how much they should allocate to bitcoin.
But other investors are more sceptical, pointing to the volatility of the cryptocurrency, which caused a “bloodbath” for hedge funds during March’s market tumult.
Some crypto specialists said comparisons to 2017 were overblown — arguing that investors have been encouraged to buy bitcoin this year in response to aggressive monetary easing policies from the world’s central banks during the coronavirus crisis. Analysts have pointed to signs that investors are buying the cryptocurrency as an alternative inflation hedge to gold.
“We don’t think the pullback is reflective of any distressing fundamentals, rather, we see the move as a well overdue correction in the aftermath of an explosive run,” said Joel Kruger, a currency strategist at LMAX Exchange in London.
A decisive test will be whether professional investors get spooked by the move lower, analysts said. Nikolaos Panigirtzoglou, a strategist at JPMorgan, said that the outlook for bitcoin would darken if inflows into investment trusts that provided exposure to it reversed.
He described Thursday’s move as “a large amount of froth clearing” from speculative and momentum-driven traders.