Overnight cryptocurrency bloodbath sees Bitcoin price plummet

Bitcoin has tanked to its lowest level in more than a year as risk-averse investors flee the notoriously volatile asset.

The world's most popular cryptocurrency fell to a low of $US60,074 ($86,836) this morning, having lost half of its value from a peak of $US126,000 ($194,895) in October last year.

It's just the latest development in the dramatic drop in value for the cryptocurrency, with a 17 per cent decline this week and a 28 per cent drop so far this year.

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So what is behind the price drop and why is it happening now?

Why is the Bitcoin price crashing?

There are a number of factors at play, but chief among them is a risk-averse approach investors are increasingly taking in financial markets amid global uncertainties.

Cryptocurrency is notoriously volatile – something there is little appetite for in the current financial environment.

"Bitcoin has been swept up in all the 'risk-off' sentiment flowing through the market," CNN Business executive editor David Goldman wrote.

"Rather than giving investors reason to buy, traders are seeing that fear as a reason to sell.

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"The continued divergence between gold (up 24 per cent since October) and Bitcoin (down 50 per cent) has only solidified that sentiment."

Westpac economist Ryan Wells also pointed to the "risk-off tone" as a reason for Bitcoin's overnight dip, while Zerocap analyst Emir Ibrahim noted there was a sell-off across more speculative assets.

"This event was not isolated to crypto," he said.

"Risk assets sold off in tandem, with a tech-led drawdown in equities and sharp reversals in commodities pointing to a broader 'dash for cash' environment."

Developments in Washington also haven't helped.

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Trump appointed Kevin Warsh as the next Federal Reserve chair of the central bank last Friday.

Crypto has typically performed well when the US central bank has had more liquidity in markets, but Warsh is considered an advocate of the opposite approach, having previously pushed for the Fed to take on a smaller balance sheet.

There are also concerns about the future of cryptocurrency regulation in Washington, despite Trump heavily backing cryptocurrency companies since his election, with hopes of a more crypto-friendly administration in Washington stalling.

Treasury Secretary Scott Bessent didn't help matters yesterday, when he testified that his department has no authority to stabilise crypto markets.

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Will the Bitcoin price recover?

This is a big unknown.

Ibrahim said in the immediate future, a rebound is unlikely, although a longer-term bounce-back is possible.

"While near-term price action is likely to remain unstable below $US65,000 ($94,057), these types of flushes historically serve to clear excess leverage and reset positioning.

"The focus now shifts to whether spot demand can absorb supply at these levels and stabilise the market ahead of the next macro catalyst."

Goldman noted, though, that this isn't new ground for Bitcoin – it has plunged and bounced back in the past.

"In 2014, crypto prices imploded after crypto exchange Mt. Gox was hacked," he wrote.

"The largest bust happened in 2018, when bitcoin tumbled 74 per cent, fueled by fear that the explosion of initial coin offerings was overdone.

"And crypto had back-to-back crashes in 2021 and 2022, after regulatory pressure and the FTX scandal shattered confidence.

"Each time, Bitcoin has bounced all the way back within a year and a half."

– with CNN, Associated Press

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