Why is bitcoin plunging?
Source: AFP
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The value of bitcoin has fallen sharply since reaching record heights last month, briefly falling below $90,000 on Tuesday compared with above $126,000 at the start of October.
Below AFP explains why investors are turning away from the volatile asset.
What has caused the latest price drop?
Prior to the recent slump, bitcoin broke a series of record highs in the wake of Donald Trump's return to the White House. The US president came out strongly in favour of cryptocurrencies before his re-election and has continued to do so.
Bitcoin first surpassed $100,000 in May before reaching its latest record of around $126,251 last month.
Support came also from expectations of an interest-rate cut from the Federal Reserve following weak US jobs data, which weighed on the dollar.
However, after Trump reignited fears of a trade war with China last month, investors sought safer assets over volatile cryptocurrencies.
Those who had bet on bitcoin continuing to rise lost heavy amounts.
According to Rachael Lucas, a crypto analyst at BTC Market, $20 billion of bitcoin trades were liquidated.
Why is bitcoin's price falling?
Bitcoin lost one quarter of its value between striking the early October record and falling under $90,000 on Tuesday.
Other cryptocurrencies declined Tuesday, including Dogecoin, the speculative digital token promoted by Elon Musk.
All assets perceived as less safe, such as stocks, are taking a hit on financial markets after the longest US government shutdown on record prevented the release of key economic data.
Such figures are deemed key to understanding by how much further the Fed could cut interest rates in the coming months to boost the economy.
At the same time, some Fed officials have indicated that a cut may not occur at the US central bank's next monetary policy meeting in December.
This has boosted the dollar, while hitting stock markets and bitcoin.
"Renewed expectations from the market for a rate cut in December on the back of some favourable economic data could quickly cause (bitcoin and other) prices to reverse and rally again very quickly," Simon Peters of brokers eToro told AFP.
Where does bitcoin go from here?
John Plassard, head of investment strategy at private bank Cite Gestion, said the current "disenchantment reflects a deeper reality" -- that individuals have been left feeling "wary" by previous price plunges, particularly of cryptocurrencies viewed even more speculative than bitcoin.
According to Thomas Probst of crypto data analysts Kaiko, the sector's volatility remains "an obstacle" to cryptocurrencies' "widespread adoption at both the individual and institutional levels".
At the same time, cryptocurrencies have benefited from the growing interest of institutions and the openness of regulators -- and not only in the United States.
The European Union has established its own framework with the MiCA regulation that entered into force at the end of last year.
London is expected to propose its own rules sometime in 2026.
Created following the 2008 global financial crisis, bitcoin initially promoted a libertarian ideal and aspired to overthrow traditional monetary and financial institutions, such as central banks.
The founding white paper, published on October 31, 2008, was penned by Satoshi Nakamoto, a pseudonym whose identity remains unknown.
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Source: AFP
