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Bitcoin approaching its worst ever slump — here's what's driving it

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK

Bitcoin (BTC-USD, BTC-GBP) is having a terrible year.

The cryptocurrency has fallen over 70% since January and is down by about 80% since its high of close to $20,000 (£15,680) in December 2017. Bitcoin’s decline in the last month has been stark, with the price down over 40%.

What’s behind this terrible slump? Analysts believe bitcoin’s poor performance has been driven by its record rally in 2017, which most now say was unfounded.

Bitcoin’s bad year: the cryptocurrency has fallen over 70% against the dollar so far in 2018. Photo: Yahoo Finance UK

Bitcoin’s price surged over 1,000% against the dollar during 2017 in what many commentators said was a speculative bubble. Inexperienced investors bought into the rally in the hopes of making big returns, rather than for any fundamental belief in bitcoin as an asset or technology.

Will Orde, an investment manager at early-stage venture capital fund Oxford Capital, told Yahoo Finance UK: “You had this populist wave that all pushed into bitcoin and then out again.

A lot of that was actually off the back of Thanksgiving dinners where the people who had been in bitcoin in the first half of last year went home, talked with their families, said ‘oh, I’ve made so much money on bitcoin,’ and got dad, cousins, and sisters excited about it — people who didn’t really understand the asset class and went in and bought it.

As soon as it dropped off a little bit, I think people panicked because they didn’t understand the asset class and they didn’t want to get caught out and lose all their money.”

David Jones, the chief market strategist at Capital.com, said: It does feel like any people who bought in during the bubble are now throwing in the towel in the face of the recent weakness.”

Recent news hasn’t helped bitcoin’s price either. The US Securities and Exchange Commission took enforcement action against crypto crowdfunding projects earlier this month, there have been reports of a US investigation into possible bitcoin price rigging, and this week there were claims that hundreds of thousands of crypto miners are going out of business due to the price slump.

It’s all about sentiment and momentum,” said Mati Greenspan, a senior analyst with trading platform eToro. 

Just as during the bull run, even bad news was taken in stride and the markets kept moving up, while the prices have been declining there are stories that probably should have been interpreted as good news and in the prices went down.

If you think about it long term, bitcoin is up more than 1,000% over the last 3 years which is incredible gains in any asset and any respect,” Greenspan said. “These bitcoin cycles have played out over and over again where we see an incredible boom and then large percentage pull backs on the bust cycle.”

Capital.com’s Jones said: “There’s no signs of a base forming just yet though – do not be surprised if there is more volatility in cryptocurrencies over the next few days.”