Bitcoin bulls were celebrating record highs this time last week — but the cryptocurrency has been dealing with a hangover since then.
The token has tumbled as much as 13% since hitting a record high of almost $74,000 and was trading at just under $68,000 on Thursday.
These sorts of sell-offs aren’t uncommon in crypto — and bitcoin is still up about 50% this year, having been powered higher by excitement surrounding the Securities and Exchange Commission’s approval of 11 spot exchange-traded funds in January.
It’s unclear exactly what’s driven the recent slump, though many investors have pointed to profit taking, with traders selling some of their holdings after the sustained rally in a bid to lock in gains.
Other cryptocurrencies have also struggled, with ether down 8% to about $3,500 over the past five days and the popular altcoin solana tumbling 12% since Monday.
Bitcoin’s weak run may persist if investors are confronted with signs of an economic slowdown, which could encourage them to sell or pivot to steadier assets such as bonds or the US dollar, Marc Ostwald, ADM Investor Services International’s chief economist, said.
“I can see a scenario where some of the risks crystallize, and people might want to get out of bitcoin,” he told Business Insider. “Say there’s an adverse economic scenario. People might recognize that they’ve got some nice, big gains from bitcoin and choose to liquidate their positions to cover their losses elsewhere.”
At the same time, the surge in risk assets including tech stocks and cryptocurrencies over the past year suggests that the market has become “anesthetized to major events” such as rising interest rates and the war in Ukraine, Ostwald added.
Other analysts are much more optimistic, dismissing the recent sell-off as a temporary blip before the much-anticipated “halving” event expected to take place in April.
The reward for mining new blocks of bitcoin will be cut in half, as part of a process that’s designed to maintain the token’s scarcity.
Bitcoin fell as much as 20% in the run-up to the previous halving, in 2020, perhaps as a result of traders opting to follow a “buy the rumor, sell the news” philosophy.
But in the immediate aftermath of the event, its price surged from under $9,000 to about $60,000 in under a year as the market adjusted to lower supply levels.
“Past halvings have gone unnoticed — but that hasn’t happened this time because bitcoin is so much more mainstream, and that should help keep up demand,” Kathleen Brooks of the online brokerage XTB told BI.
“Why wouldn’t people want to own bitcoin if they think it’s a finite asset, a bit like gold?” she added.
Meanwhile, Sandy Kaul of Franklin Templeton previously told BI that the combination of halving and the rise of spot bitcoin ETFs could open the door for an “explosive setup.”
“The dynamic could put us in uncharted territory,” she said. “We’ve never had both a supply shock and a demand shock at the same time.”
Check out: Personal Finance Insider’s picks for best cryptocurrency exchanges
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