Bitcoin has been on a rollercoaster ride over the last few years but things have been looking up as 2023 draws to a close.

All cryptocurrency is volatile with a track record of “boom and bust” cycles that have left many wondering whether it’s safe to invest.

The price of bitcoin, the most popular cryptocurrency, dropped below $16,000 in November 2022, a year after it reached a record high of $69,000. This year has been one of slow recovery for the most part.

So what’s behind bitcoin’s recent price action, and what might the future hold for the market?

In this article we explain:

What’s happening to bitcoin’s price?

Bitcoin is incredibly volatile. It is prone to rising and falling sharply on a daily basis.

The first three quarters of 2023 was a period of stabilisation for bitcoin. It gradually clawed its way back from the lows to the mid-twenty thousands. It was stuck in that range for several months until October arrived, which saw a big spike.

Excitement about bitcoin ETFs being launched by major investment firms and the upcoming ‘halving’ in April 2024 has gathered pace as the year closes. The price jumped to a year-to-date high above $44,000 in the first week of December.

Bitcoin isn’t the only cryptocurrency to be experiencing a tumultuous period. Generally, bitcoin’s price action reflects wider market trends, with alternative cryptocurrencies known as ‘altcoins’ having a tendency to rise and fall in similar waves.

Ethereum, the second-largest cryptocurrency, is also up significantly in the final quarter of the year and is currently trading at a price of around $2200 a coin.

Why has the price struggled for most of 2023?

It’s impossible to assign a single clear cause behind bitcoin’s price action, but here are some possible reasons:

• The Wall Street Journal reported that Elon Musk’s spacecraft manufacturing company, SpaceX, may have sold part or all of its bitcoin holdings
• Analysts expect the American central bank to keep hiking interest rates. This will make borrowing more expensive and potentially hamper spending on cryptocurrency, with investors instead favouring safer, traditional savings routes
• Evergrande, a Chinese property development giant, has recently filed for bankruptcy. There are fears that due to the size of the firm, the collapse will send ripples through the Chinese economy and hamper confidence, lowering cryptocurrency investment
• While inflation has fallen in several developed countries, there are still fears that it could remain historically high for some time. This can have a negative effect on consumer confidence and spending on cryptocurrency
• The cryptocurrency market has begun to face regulation in several major countries including China and United States – and therefore a stricter framework of rules. This has seen cryptocurrency exchanges such as Bittrex forced to shut down.
• But while regulation could harm cryptocurrency prices in the short term, stricter policing of the market may give consumers greater confidence over the long run, which could see the market stabilise

It’s not just the cryptocurrency market suffering. Global stocks have had a difficult year as result of:

• The war in Ukraine
• Inflationary fears
• Higher interest rates, which have made it more expensive for businesses to borrow money

Turbulence in the stock market has spilled over into the cryptocurrency space.

Is a bitcoin crash coming, or will the price go up more?

There are no guarantees when it comes to investing, especially with cryptocurrency. As quickly as bitcoin falls, it could just as rapidly climb again.

There are a number of ongoing concerns about cryptocurrencies:

• Cryptocurrency exchanges going bust
• Crackdowns and heightened regulation in countries like China, the United States and the United Kingdom
• Calls for greater regulation across the globe
• Environmental concerns
• Security issues and hacks
• The price being based solely on speculation

Further regulation is seen as a threat to the decentralisation of crypto, which is having an impact on the prices of digital currencies.

In the UK, the Financial Conduct Authority (FCA) is taking steps to crack down on the cryptocurrency market. This includes forcing investors to wait 24 hours after depositing money into cryptocurrency exchanges before they can access it. Find out more about the FCA’s crackdown on crypto.

The FCA’s action is indicative of a wider trend of governments across the world taking the risks of cryptocurrency more seriously. If further steps are taken by regulators, we could see a fall in investment as the potential for profit in the market declines.

However, in the long run, heightened regulation may prove fruitful for the market. This is because consumers may grow more confident with a stronger framework of rules, and a fall in volatility within the crypto market may cause them to be less fearful of losing large amounts of money.

What are the positives of bitcoin and other cryptocurrencies?

Bitcoin’s fans point to other positive qualities:

• Transformative technology that could revolutionise industries
• Simpler and cheaper transactions by cutting out “middle men” such as banks
• Easier global trade because, with a non-fiat digital currency, there would be no concerns about exchange rates
• Transactions are more confidential
• It is a  safe store of value because it can’t be printed or seized
• Bitcoin has been touted as an alternative to gold, meaning it could prove itself as a hedge against inflation

Given its volatile nature, it is possible that bitcoin will gather momentum again at some point in the future (perhaps weeks, months or even years down the line, or perhaps not at all).

Cryptocurrency proponents will point out that given bitcoin’s previous meteoric rises, it cannot be ruled out that the same could happen again.

But no one has a crystal ball and the speculative nature of bitcoin makes it difficult to predict.

Find out more about the tips (and mistakes to avoid) when investing with cryptocurrencies.

What caused bitcoin’s big crash in 2022?

In March 2022, the price of one bitcoin was around $46,000. But the market turbulence that followed saw this drop by nearly two thirds.

In June 2022 bitcoin dropped below $20,000 for the first time since 2020. This was prompted by the decision of Celsius Network, a major US cryptocurrency lending company, to freeze withdrawals and transfers, citing “extreme” conditions.

The move fuelled a slump across the cryptocurrency market.

However, the most significant blow for crypto in 2022 was triggered by the collapse of FTX in November. This was a major cryptocurrency exchange which handled around $1 billion transactions each day. Its collapse had a knock-on effect on other crypto exchanges. In November 2022, the price of bitcoin fell to around $16,000, a far cry from its peak of around $65,000 a year prior.

China’s continued crackdown on crypto also played a role. Transacting with or trading major cryptocurrencies is illegal there, as is ‘mining’ bitcoin – the process via which bitcoin is obtained. Find out more about how cryptocurrency works.

In addition to this, 2022 saw sudden and severe sell-offs of major cryptocurrencies. This triggered panic and further sell-offs which has knocked consumer confidence.

Despite 2022 being a torrid year for bitcoin, it has since recovered some of the ground it lost last year and is now worth around $26,000.

What were the negative stories behind bitcoin’s 2022 collapse?

Negative stories

A number of negative stories and threats of further regulation contributed to bitcoin’s collapse in 2022.

These included:

• November 2022 cryptocurrency exchange FTX went bust
• June 2022, Celsius Network, a major US cryptocurrency lending company, froze withdrawals and transfers, citing “extreme” conditions
• June 2022, Binance, one of the world’s largest cryptocurrency exchanges, paused bitcoin withdrawals, blaming a “stuck transaction” that was causing a backlog
• Early 2022, reports that Russia might ban cryptocurrency operations. After the invasion of Ukraine, there were calls for crypto exchanges to ban Russian transactions.
• May 2021, Tesla boss Elon Musk said that the electric car maker would no longer be accepting digital payments over environmental concerns
• June 2021, banks and payment institutions in China were told to stop enabling crypto transactions, and the Chinese government banned the mining of the currencies. Then in September 2021, all crypto transactions were declared illegal
• June 2021, then US president Donald Trump described bitcoin as a “scam” competing against the dollar to be “the currency of the world”
• FBI agents have seized millions of dollars in bitcoin from criminals over the years.
• August 2021, UK regulator the FCA in effect blacklisted Binance. Big banks such as HSBC and Santander blocked customers from making payments to Binance.
• August 2021, the International Monetary Fund warned the widespread use of crypto would threaten “macroeconomic stability” and could harm financial integrity.

What were the positive stories behind crypto’s rise in 2021?

There have also been more positive stories and these have given the bitcoin price some protection over the past couple of years, as well as propelling bitcoin to its peak of around $65,000 in November 2021:

• March 2021, Morgan Stanley became the first big US bank to offer wealthier clients access to bitcoin funds – albeit restricted to no more than 2.5% of an investor’s total net worth.
• June 2021, a month after sparking a crypto sell-off, Elon Musk said Tesla would probably accept bitcoin payments again when more than 50% of its energy usage came from renewable sources.
• July 2021 Amazon posted a job advert for a “digital currency and blockchain product lead” prompting speculation that it would soon accept bitcoin as payment.
• Sept 2021 El Salvador become the first country to make bitcoin legal tender

Other stories have been more mixed in terms of what they mean for cryptocurrencies. Among them has been the US Federal Reserve considering whether to launch its own “central bank digital currency” (CBDC).

President Joe Biden issued an executive order that aims to co-ordinate the US government’s actions on the regulation of digital assets.

While many crypto fans think regulation is a bad thing, some think this new executive order could help with the development of digital assets, such as the CBDC, to ensure the right consumer protections are in place.

Read our article here if you are still wondering whether or not to invest in bitcoin.

What makes bitcoin so volatile?

Unlike traditional investments such as company shares, where price movements may well be influenced by the performance of the business, bitcoin has no underlying asset.

This means that the movements in its price are based purely on speculation among investors about whether it will rise or fall in future.

As a result, there can be violent swings in the price of bitcoin, even in the space of 24 hours.

At the moment, high inflation and a cost of living crisis are causing people to reduce their investment risk. This has led to people selling their cryptocurrency.

Has bitcoin’s bubble burst before?

In 2021 the price soared by more than 700% in 12 months to a record high of $69,000 in November.

It certainly seemed like bitcoin’s bubble had burst as investors have lost confidence in the crypto sector. It is uncertainty over the future of bitcoin which caused prices to crash in 2022.

In June 2022, it plummeted below $18,000. It was still below $20,000 by November 2022, just a year after its record high of $69,000.

While it has since shown signs of recovery, it’s still a long way off from its record highs.

When assets rise very quickly in price and surge to a record high, typically this makes a crash much more likely – or at least a correction, which is when the price falls back down to a more “normal” level.

This appears to be the situation that bitcoin is in right now. It took the cryptocurrency:

• 11 years from launch to get to $20,000 per coin
• But only three weeks for bitcoin’s price to double from there

A decisive year for crypto investors was 2013. Bitcoin’s price went from $13.40 at the start of the year to its height in December of $1,156.10, before falling to about $760 three days later.

Where it is heading next is equally unpredictable.

Check out one Times Money Mentor reader’s crypto experience: “Bitcoin’s rollercoaster ride has swept me to an £8,500 profit in less than a year”

Will bitcoin go up if the stock market crashes?

Not necessarily. Supporters of bitcoin see it as a diversifier in balanced portfolios, but it did no better than stocks at the start of the coronavirus pandemic. This is because investors panic-sold everything.

In the first two weeks of March 2020, bitcoin went down by more than 40%.

“That was when we saw all equity markets take an aggressive leg down because of concerns about Covid-19,” notes Rosie Bullard, partner and portfolio manager at James Hambro & Partners. “So it wasn’t exactly a store of value in an equity market reversal.”

“If you look back to March of last year when we saw the market collapse, you didn’t see bitcoin suddenly rally in that period.”

Rosie Bullard, partner and portfolio manager at James Hambro & Partners

That said, how crypto assets perform during stock market falls will depend on why financial markets have collapsed.

If it was all about an inflationary shock, such as happened in 1974, most bitcoin investors believe it would provide protection.

If you want to read more about the alternatives to bitcoin, check out our article here.