Bitcoin ends dramatic week with 20% slump followed by recovery

Amid warnings of bubbles and infernos, currency hits new high of $16,660, crashes, then recovers to $15,350 as London closed

Bitcoin rounded off a week of frenzied investor speculation with a day of whipsaw trading that knocked nearly 20% off its value at one point, but still left the cryptocurrency changing hands at more than $15,000 (£11,000).

The currency, which was likened to Dante’s Inferno by one senior banker this week, rocketed to a new high of $16,660 overnight before slumping to $13,482 by midday on Friday. As the London markets were closing, bitcoin had recovered some of its losses to trade at $15,350 – having started the week at $10,875 and the year at $966.

Bitcoin investors are used to wild fluctuations in its value, with sudden drops immediately followed by a return to its long-term upward trajectory. The cryptocurrency has jumped 40% this week, drawing comparisons with the 17th-century tulip bubble.

There were fresh warnings about the virtual currency on Friday. Jamie Dimon, chief executive of US bank JP Morgan, told broadcaster CNBC: “Everyone has a personal opinion about bitcoin. I remain highly sceptical of it. But as I’ve said previously, I’m open-minded to uses of cryptocurrencies if properly controlled and regulated.”

His remarks follow those of Sir Howard Davies, chairman of Royal Bank of Scotland, who painted an apocalyptic picture for bitcoin. “Put up the sign from Dante’s Inferno – ‘Abandon hope all ye who enter here’ – I think that’s probably what’s needed,” Davies said.

Nobel-prize-winning economist Joseph Stiglitz has previously argued that the currency should be outlawed.

bitcoin graphic

Part of the rally in bitcoin can be explained by the planned launch on Sunday of a new product on the Chicago Board Options Exchange, which specialises in complex derivatives contracts. The CBOE is launching a futures contract that will allow traders to take bets – or protect themselves from movements – on the price of bitcoin in the future.

But JP Morgan is said to be among two major US banks, the other being Citi, which is initially holding back from getting involved in the new product, illustrating the lingering anxiety about virtual currencies, which are not backed by central banks.

JP Morgan and Citi would not comment on a report in the Financial Times that they were not going to get involved initially in clearing the new product, which involves standing between the parties involved in a transaction.

A spokesperson for the CBOE said the exchange was comfortable with the position before Sunday’s launch. US investment bank Goldman Sachs said it was “evaluating the specifications and risk attributes for the bitcoin futures contracts as part of our standard due diligence process”.

The FT has previously reported that Wall Street banks had written to US regulators to warn that the system was ill-prepared for bitcoin products.

Another futures contract is expected to be launched before the end of the year and Daniele Bianchi, assistant professor of finance at Warwick Business School, said their launch was a way to make bitcoin more mainstream. “It is evident that what is driving the price of bitcoin at the moment is its legitimacy as an investment asset,” he said.

“Although many commentators argue that bitcoin is a pure bubble, the reality is more likely that people investing in bitcoin are primarily investing in the blockchain as a technology at the forefront of innovation in financial markets.”

But James Lockyer, a technology equity research analyst at stockbroker Peel Hunt, who has dabbled in bitcoin himself, said: “Bitcoin is in a bubble at the moment.”

He said that while there were comparisons with the tulip frenzy in the Netherlands in the 1630s, when bulb prices reportedly rose more than 1,000% in a month, there were also differences.

“For tulips, they failed the main attributes of currency (including divisibility, imperishability, and homogeneity), and hence once the realisation that there wasn’t enough intrinsic value surfaced, the price plummeted. For bitcoin, it does meet a lot more of these main attributes, but whether it will ever meet the ‘general acceptability’ attribute is yet to be seen,” said Lockyer.

Amid calls for central banks to step in regulate bitcoin and other cryptocurrencies, Andrew Kenningham, chief global economist at consultancy Capital Economics, said the overall value of bitcoins was not enough to cause alarm. “If the price of bitcoin fell to zero today, the paper losses would be the equivalent to a 0.65% fall in US equity prices,” he said.

Contributor

Jill Treanor

The GuardianTramp

Related Content

Article image
Bitcoin is a vehicle for fraudsters, warns Goldman Sachs boss
CEO Lloyd Blankfein attacks cryptocurrency after value dives 20% in a day, saying bank will not get involved until it becomes less volatile

Angela Monaghan

30, Nov, 2017 @6:25 PM

Article image
ECB official backs bitcoin clampdown
Yves Mersch joins growing list of experts calling for ban of cryptocurrencies

Julia Kollewe

08, Feb, 2018 @1:23 PM

Article image
Bitcoin nears $10,000 mark as hedge funds plough in
Cryptocurrency now worth seven times an ounce of gold, with market cap higher than IBM, McDonald’s or Disney – but analysts warn of ‘a huge bubble’

Julia Kollewe

27, Nov, 2017 @3:00 PM

Article image
Bitcoin: what have experts said about the cryptocurrency?
The most memorable comments on the cryptocurrency from senior figures in world finance

Julia Kollewe

08, Feb, 2018 @5:02 PM

Article image
Bitcoin: is it a bubble waiting to burst or a good investment?
Disciples of the cryptocurrency plan to hold on for dear life but traditional finance is getting twitchy

Richard Partington Economics correspondent

02, Dec, 2017 @7:00 AM

Article image
Bitcoin tops $1,000 for first time in three years as 2017 trading begins
Digital currency outperformed all its central-bank-issued counterparts in 2016 with 125% rise in value

Simon Goodley and agencies

02, Jan, 2017 @12:31 PM

Article image
RBS boss likens bitcoin to Dante’s Inferno as currency tops $15,000
Call from Sir Howard Davies to take action on digital currency follows warnings from other senior figures in finance

Richard Partington

07, Dec, 2017 @2:56 PM

Article image
Bitcoin will survive despite MtGox debacle

Phillip Inman: Despite the Japanese exchange going offline and rumours of millions in theft, the digital currency will continue to evolve

Phillip Inman, economics correspondent

25, Feb, 2014 @5:18 PM

Article image
Bitcoin: after 10 wild years, what next for cryptocurrencies?
From next to no value in 2009, it rose to $20,000 and crashed back to $3,000 within a decade

Richard Partington

04, Jan, 2019 @4:30 PM

Article image
Bitcoin passes $11,000 on news of Facebook's cryptocurrency plan
The original cryptocurrency hits 15-month high as traders bet move will legitimise sector

Richard Partington Economics correspondent

24, Jun, 2019 @4:11 PM