Bitcoin lost more than a quarter of its value on Friday as an analyst warned that investors in the cryptocurrency had finally been introduced to the law of financial gravity.
In the latest illustration of bitcoin’s volatility, it slumped to below $11,500 at one point on Friday – touching $11,159 – having started the week at a record high close to $20,000 and in its biggest weekly fall since 2013. However, by 5pm London time it was trading at $12,800 as the currency endured a see-saw day.
It is a sudden reversal of bitcoin’s upward trajectory this year, having started 2017 at $966, and sparked warnings that investors need to beware that they are not risking a rerun of the 17th century tulip bubble.
Bitcoin trades on a number of exchanges and one, Coinbase, was reported to have suspended transactions temporarily while there was also a temporary halt of the new futures contract – which allows investors to take bets on the value of the digital currency at a predetermined point in the future – on the Chicago Board Options Exchange while it waited for the price to stabilised.
Two futures contracts have been launched this month, which were regarded as taking a step towards legitimising digital currencies at a time when regulators are stepping up their surveillance of products linked to the new technology.
Friday’s slump was said to have been fuelled by the founder of another cryptocurrency selling his holdings. Charlie Lee, founder of Litecoin, said he was selling his holdings to avoid a conflict of interest that he faces when talking about the price of the currency which could appear to benefit him.
Jasper Lawler, head of research at London Capital Group, said this decision was probably the “root-cause of the insecurity that’s been felt across the cryptocurrency space”.
“Bitcoin investors were introduced to the law of gravity over the last 24 hours … Long term holders will be used to this level of volatility but newer crypto traders could be permanently put off,” said Lawler.
“The exponential price rise seen recently needs new investors to sustain it. In a bubble market it’s known as the ‘bigger fool’ theory; you can buy high as long as there is a fool willing to buy it off you even higher,” he added.
Charles Hayter, founder and chief executive of industry website CryptoCompare, said: “A manic upward swing led by the herd will be followed by a downturn as the emotional sentiment changes. A lot of traders have been waiting for this large correction.”
Sir Howard Davies, chairman of RBS, has likened investing in bitcoin to Dante’s Inferno – “Abandon hope all ye who enter here” – while Jamie Dimon, the head of JP Morgan, has talked about bitcoin as being worse than tulip mania, which took place in the Netherlands in the 1630s, when bulb prices reportedly rose more than 1,000% in a month.
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Analysts said the dramatic moves in the runup to the end of 2017 meant that it was difficult to predict what would happen in the new year when trading volumes are expected to rise.
Lukman Otunuga, research analyst at financial firm FXTM, said: “The aggressively bearish price action witnessed this week may prompt investors to start questioning if bitcoin will recover from the selloff or remain depressed moving into the new year.”
Regulators have been sounding a cautious note about bitcoin, which is not regulated and is controlled by a network of computers that update all transactions which take place on a variety of trading platforms around the world. It only exists digitally and is “mined” using mathematical equations.
While the Bank of England has said it is not a risk to financial stability, governor Mark Carney told MPs this week that he expected international regulators will discuss cryptocurrencies and the potential future role of central bank digital currencies.
The Financial Conduct Authority has issued warnings about initial coin offerings (ICOs) which use cryptocurrencies to raise funds for startup businesses. Investors in ICOs pay in cryptocurrencies such as bitcoin and receive a “coin” in return, rather than shares in the company.
Andrew Bailey, chief executive of the FCA, has said bitcoin is not a really currency but more like a commodity.
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