Bitcoin came under one of the most intense regulatory crackdowns in its brief history during the third quarter, choking off attempts by traders to lift the digital currency out of its steep spring selloff.
The governments of the two largest economies in the world took direct aim at bitcoin and the cryptocurrency market. In the U.S., agencies like the Securities and Exchange Commission have promised a crackdown on the sector. The Treasury Department is preparing a report on stablecoins—digital currencies that tout values fixed to the dollar—amid concern about their potential to cause problems in both crypto and traditional markets. And powerful U.S. Sen. Elizabeth Warren (D., Mass.) has emerged in Congress as a vocal critic of cryptocurrencies.
China went further. The country banned bitcoin and cryptocurrencies. Bitcoin “miners,” companies largely located in China that operate the computers that actually run the network, were forced to leave the country. Online exchanges catering to Chinese citizens that had moved offshore after prior bans have stopped or soon will stop accepting new customers from China.
All of this had an effect on bitcoin’s price. At the start of the third quarter, the digital currency continued a slide that began after its price peaked at a record high of $63,381 set on April 15.
By mid-July, with the price below $31,000, bitcoin began to rally. The gains stuck and bitcoin, at around $41,000, is up about 17% for the quarter.
Yet the regulatory pressure prevented the rally from going further. Bitcoin at one point regained the $50,000 level, only to give up ground as China imposed its ban.
So, at current levels, bitcoin remains about a third below the April record.
“It’s probably one of the most fascinating 90-day periods we’ve had,” said Bill Barhydt, the co-founder and chief executive of Abra, a crypto-trading services firm.
Other cryptos also had a mixed quarter. Ether, the native currency of the Ethereum network, rose about 24% in the quarter, to $2,820. But it is down about 29% from the quarter’s high point of $3,952 set on Sept. 5. Meanwhile, dogecoin, a favorite of meme traders, fell from 25 cents on June 30 to 20 cents on Sept. 29.
The regulatory pressure damped momentum in other ways, too. The number of daily transactions on the bitcoin network has fallen to a range of about 175,000 to 200,000. That is about equal with levels from the 2018 bitcoin bear market and is well off highs above 300,000 earlier in the year, according to data from research firm Glassnode.
While the regulatory crackdown is an immediate factor affecting prices, the quarter’s action also appeared to fit within bitcoin’s distinct boom-bust cycles. In 2013, bitcoin’s price rose to about $1,100, then plunged by 87% through 2016. In 2017, the price rose to nearly $20,000, then fell 84% over the subsequent year.
It looks like the cycle is repeating itself again, said Lukas Enzersdorfer-Konrad, the chief product officer at European crypto broker Bitpanda.
What drives these phases in crypto, he said, is the adoption rate. The momentum phase draws in new people. This drives the price higher, which eventually overheats the small market. That leads to a “cool off” phase while the market and industry absorb the new growth.
The market looks like it is out of a momentum phase and back into an “accumulation” phase, Mr. Enzersdorfer-Konrad said. If that is so, bitcoin could be in for up to another year of this kind of rangebound trading.
Other corners of the crypto market had a little more life during the quarter, only to fall off by the end of September.
The total amount of money in the so-called DeFi sector—a collection of bank-like financial services tied to cryptocurrencies—has fallen to about $81 billion from a record high of $97 billion in early September, according to website DeFi Pulse.
Sales of NFTs, or nonfungible tokens, also rose and fell in the quarter. These are unique, bitcoin-like digital tokens that often represent digital artwork or other real-world assets.
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NFT sales reached a high on Aug. 29 of about $267 million, according to data site NonFungible.com. That is up from only $2.4 million on June 30. However, sales in September fell sharply. On Sept. 27, sales totaled $18 million.
One group of investors remains bullish: venture capitalists. Crypto companies raised a record $7.5 billion in the third quarter, according to data from research firm PitchBook. That is more than the $5.3 billion raised in all of 2020 and the $7 billion raised in the first quarter, the previous record.
Trends like that are why Abra’s Mr. Barhydt is still optimistic. He thinks the current market pause could be short lived. “I don’t think we’re done,” he said. “You’re going to see another explosive move in crypto.”
Write to Paul Vigna at paul.vigna@wsj.com
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