Bitcoin faced one of its biggest tests this week, losing almost 20% of its value after the world's largest cryptocurrency reached a record high Monday.
The digital currency plunged as much as 30% on Friday, then pared its losses, as this week's sell-off extended to a fourth day. The weekly decline is the biggest in almost three years. Other cryptocurrencies also tumbled: Ethereum dropped as much as 36% and litecoin slumped as much as 43%, according to composite prices on Bloomberg.
Michael Novogratz, a former Goldman Sachs Group Inc. and Fortress Investment Group macro trader, said he's shelving plans to start a cryptocurrency hedge fund and predicted that bitcoin may extend its plunge to $8,000.
"We didn't like market conditions and we wanted to reevaluate what we're doing," Novogratz said in a phone interview. He predicted last week that bitcoin could reach $40,000 within a few months.
Bitcoin dropped as low as $10,776 before recovering to $14,303 shortly after 1 p.m. Pacific time. It last traded below $10,000 on Dec. 1, when the U.S. Commodity Futures Trading Commission agreed to allow trading in bitcoin futures. The price of the digital coin had more than doubled in the previous three weeks.
The losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, both of which rapidly entered the mainstream in recent weeks. Some cast doubt on the value of the virtual assets, with UBS Group this week calling bitcoin the "biggest speculative bubble in history." Others argue that the technology is a game changer for the world of investment and finance. Both sides will be closely watching the outcome of the current sell-off.
"The sharks are beginning to circle here, and the futures markets may give them a venue to strike," said Ross Norman, chief executive of London-based bullion dealer Sharps Pixley, which offers gold in exchange for bitcoin. "Bitcoin's been heavily driven by retail investors, but there'll be some aggressive funds looking for the right opportunity to hammer this thing lower."
Traders who bought the currency on futures exchanges using collateral may start facing margin calls after the price decline. Two venues launched products in recent weeks that required hefty security, with Cboe needing 44% to clear contracts, and the CME 47%. Brokers set safety nets even higher.
Coinbase, one of the world's largest cryptocurrency exchanges, said all buying and selling was temporarily disabled during Friday's rout, after having delays in processing wire transfers and verifying new customers for the last week because of higher traffic. Bitcoin transaction volume jumped more than 30% on Coinbase's GDAX exchange, while fees to approve and record the transactions on the blockchain surged to a record $55, according to Bit Info Charts.
Many of the recent news stories and market moves connected to cryptocurrencies appear to carry hallmarks of the mania phase of a bubble. Long Island Iced Tea Corp. shares rose as much as 289% on Thursday after the unprofitable Hicksville, N.Y., company rebranded itself Long Blockchain Corp. Bank of Japan Gov. Haruhiko Kuroda said Thursday that bitcoin isn't functioning like a normal means of payment and is being used for speculation.
Still, cryptocurrencies are attracting established players. Goldman Sachs Group Inc. is setting up a trading desk to make markets in digital currencies such as bitcoin, according to people with knowledge of the strategy. The bank aims to get the business running by the end of June, if not earlier, two of the people said.
Liedtka and Schatzker write for Bloomberg.
3 p.m.: This article was updated throughout with additional information.