Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The Bitcoin price slipped as low as $29,300 this week, a fall of more than 50% from its $65,000 peak only three months ago.

Bitcoin always promised to be a bumpy ride, and right now that’s what it’s delivering. Here are four things you should know about the latest falls.

1 - Regulators are circling

Bitcoin was created in the aftermath of the Global Financial Crisis by Satoshi Nakamoto. This mysterious figure, who may or may not have ever existed, envisaged a decentralised currency free from government and central bank control. Naturally, much of its appeal since has lain in its anti-authority ambitions.

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Until recently, Bitcoin had done a pretty good job of staying clear of regulators. But US officials, headed by Treasury secretary Janet Yellen, this week declared their intentions to provide an “appropriate US regulatory framework” for stablecoins, an important part of the digital economy. European regulators also want to make cryptocurrencies more traceable.

Yellen’s comments shed around $2,000 from the Bitcoin price this week, but in truth the cryptocurrency has been falling steadily since April. There are other worries also at play.

2 - Environmental impact

We’ve written before about Bitcoin’s stark environmental impact. The “mining” process behind producing new bitcoins is staggeringly carbon intensive, to the extent that Bitcoin consumes more electricity on an annual basis than nations such as Switzerland and Israel. The higher the Bitcoin price rises, the more carbon it produces.

As evidence that an asset’s environmental risks can also pose financial risks to investors, mounting backlash against Bitcoin’s impact has sent its price stumbling.

One catalyst was an announcement from Elon Musk (self-declared sheriff of the crypto wild west) that Tesla would not accept Bitcoin as payment, citing environmental concerns as the reason why - though Musk has since said Tesla would “most likely” resume accepting payments in the future.

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3 - China clamps down

China, the world’s largest producer of Bitcoin, is also clamping down. Though it’s long made moves against cryptocurrencies, perhaps the most drastic signal of China’s intentions came in May, when the government confirmed a ban on transactions. Officials in China’s four major mining regions have banned the production practice outright.

Environmental concerns are part of it - by far the world’s biggest electricity consumer, clamping down on Bitcoin mining is a sure-fire way for China to cut emissions.

But the country has long shared an uneasy relationship with crypto. Widespread Bitcoin production and use jars with the government’s focus on controlling people’s transactions. Its plan to issue the world’s first central back digital currency leaves little room for decentralised alternatives.

4 - Bitcoin is volatile

You know this by now, but it’s worth repeating. There’s plenty of money to be made here, but there’s also plenty to be lost. The Financial Conduct Authority reminded UK investors earlier this year of the potential to “lose all their money” invested in the asset.

Trading in Bitcoin is, for now at least, pure speculation. It serves little material function and offers no income. With little in the way of fundamentals behind it, its price is susceptible to all kinds of influences. A tweet from Elon Musk can be as powerful as a national clampdown.

No doubt the currency will rebound from its current nadirs - no doubt too this won’t be the last time it stings investors.

Five year performance

(%) As at 30 Jun

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Bitcoin 329.5 127.3 96.6 -25.1 278.2

Past performance is not a reliable indicator of future returns

Source: Refinitiv, returns in US dollar terms as at 30.6.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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