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Cryptocurrency prices have fallen amid fears over American interest rates, worries about an AI tech stock bubble and investors cashing in on their profits.
The price of bitcoin, the most popular cryptocurrency, has fallen to £65,884. This is a 29 per cent drop since early October, when it hit a record £92,530, according to the cryptocurrency exchange Kraken. Prices of other cryptocurrencies have fallen too. Ethereum is down 27.5 per cent and solana 31.7 per cent over the past month.
Cryptocurrencies are digital tokens that are mined using computer programs. They have become increasingly popular among casual and professional investors, although they are largely unregulated.
Here’s why prices have fallen, and whether investors should be concerned.
What’s behind the drop?
Bitcoin has been likened to digital gold because strict rules mean the number of coins in circulation will never exceed 21 million. However, analysts say its recent performance has more in common with US tech stocks.
The main US stock market, the S&P 500, has fallen 0.57 per cent over the past month, and the tech-focused Nasdaq Composite 2.34 per cent. However, gold and US government bond prices have risen. Like stocks, the price of crypto is sensitive to expected changes in interest rates. Lower rates reduce borrowing costs and give consumers more spending power.
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The US Federal Reserve, the country’s central bank, cut interest rates by 0.25 percentage points to 3.75-4 per cent in October. But the stock market reaction was muted because of uncertainty over whether rates would be cut again when board members meet next, on December 10. The stock market has also been affected by fears of an “AI bubble”, a recent US government shutdown and trade tensions between the US and China.
At the same time, many long-term investors of cryptocurrencies are cashing in after a 362 per cent rise in the price of bitcoin over the past five years. In the 30 days to November 13, 815,000 bitcoins were sold by long-term holders (those who have had them for longer than 155 days), according to the analyst CryptoQuant. This is the highest amount since January 2024.
Sui Chung from the crypto pricing company CF Benchmarks said: “The dominant forces in crypto are major global asset managers, so price action is now driven less by niche speculative flows and more by how investors view crypto’s prospects relative to traditional asset classes like equities and bonds. And as we approach year-end, we’re clearly seeing investors lock in profits.”
A recent research note from the investment bank Deutsche Bank said: “Bitcoin’s sell-off coincided with a broader downturn in equities. Since October bitcoin has behaved more like a high-growth tech stock than a store of value.”
Should investors worry?
It is not unusual for the price of cryptocurrencies such as bitcoin to change 30 per cent in a short space of time. Longer-term holders of crypto are used to the bumpy ride.
Simon Peters from the investment platform eToro said: “While the recent correction has rattled some investors, volatility of this scale is not unusual. Bitcoin has had several 30 per cent-plus falls in recent years, the last between January and April, when it dropped from $109,000 to $74,500 before rallying 70 per cent to an all-time high.”
This volatility is why, if you plan to invest, experts recommend keeping cryptocurrencies to a small part of a wider portfolio. There are promising signs that the worst of the crash could be over. Money flowed back into digital asset funds last week, while Peters said there was positive news around US interest rates, although a rate cut could hinge on US employment and inflation data, which is due to be released this week.
He said: “Markets have been gaining momentum due to the odds of a rate cut at December’s meeting increasing significantly in the last week. Favourable economic data could provide a tailwind to the rebound in crypto markets that we’re seeing.”