BITCOIN reached record-breaking highs last month – but it’s value has nearly halved since within a blink of an eye.
Despite spiking at $64,536 in April, it’s value has plummeted to $36,664 just under six weeks later, according to CoinMarketCap.
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But why has one of the oldest and most popular cryptocurrencies dropped so dramatically – and so quickly?
We explain all you need to know, but first, a word of warning: buying cryptocurrencies is a very risky business.
Investing is not a guaranteed way to make money – so make sure you know the risks and can afford to lose money.
Cryptocurrencies are highly volatile, so while your cash can go up, it can just as easily go down in the blink of an eye.
As always, you shouldn’t invest in something you don’t understand.
Why has Bitcoin dropped?
Bitcoin peaked in value on April 14, boosted by the major cryptocurrency exchange, Coinbase, going public.
But just four days later, it recorded its biggest drop in two months, following two major blows to the cryptocurrency market.
Turkey’s central bank announced it would be banning the use of cryptocurrencies for purchases.
A blackout in China’s Xinjiang region, which powers a lot of Bitcoin mining, meant the coin took a further hit.
It tumbled to a seven week low of $48,001, but started to rally after some mainstream businesses said they would let customers pay using more well known virtual currencies.
5 risks of crypto investments
THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
For instance, Paypal recently announced that its users will be able to buy and sell bitcoin – and even make purchases using the cryptocurrency.
Both Mastercard and BNY Mellon have also revealed plans to incorporate Bitcoin into their businesses.
But on May 12, Elon Musk shocked investors after announcing Tesla would no longer be accepting Bitcoin as payment for its vehicles – and the cryptocurrency has spiralled since then.
What did Elon Musk say about Bitcoin?
In February, Musk said Tesla would soon be allowing customers to purchase items using Bitcoin.
At the same time, it was revealed that the company had also invested $1.5billion in Bitcoin itself.
But in a dramatic u-turn just three months later, Musk said Tesla would not be accepting the cryptocurrency.
This was due to concerns the company had over the harmful effects that mining the Bitcoin has on the environment.
Mining for cryptocurrencies requires a huge amount of energy, sparking concern from environmentalists over the impact this is having on the environment.
Since Musk’s announcement, Bitcoin has dropped from $56,834 to $36,664 at the time of writing – a 35% drop.
The tumble was fuelled further by last week’s news that China has banned banks from providing services related to cryptocurrency transactions.
It also warned investors against speculative crypto trading.
Hargreaves Lansdown senior investment analyst Susannah Streeter said the crackdown in China, combined with Musk giving Bitcoin the cold shoulder, has sent “shudders through the market”.
She said the price of Bitcoin could fall further.
“Although the first blow has come from China, central bank fists are at the ready elsewhere,” she said.
“In the US Jerome Powell, the head of the US Federal Reserve said last week that cryptocurrencies pose a significant risk to financial stability, suggesting greater regulation may be necessary.”
Another “drag on the price” could come amid mounting concerns about the amount of energy being used to mine crypto currencies.
“That could also lead institutions around the world, who have bought in to Bitcoin to reduce their holdings, leading to fresh falls,” she said.
“Given the huge volatility and that the use case of crypto currencies is far from proven, traders should only dabble with money they can afford to lose.’’
Could Bitcoin make a comeback?
Although Bitcoin is continuing to slump, AJ Bell financial analyst Laith Khalef said a bounceback could be possible due to the coin’s volatile nature.
However, he warned about investing in Bitcoin and said Brits should be prepared to lose it all.
“It’s entirely possible that Bitcoin will make a comeback at some point, but without any intrinsic value that can be placed on the cryptocurrency, it’s price will mainly be driven by sentiment, which is a fickle beast at the best of times,” he said.
“Anyone buying Bitcoin should be prepared to lose all their money in the worst case scenario, because it’s long term adoption by businesses and consumers is extremely uncertain, to say the least.”
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