Why is Bitcoin price dropping? Drop in cryptocurrency price explained as bond yields increase

The value of Bitcoin has plummeted this week amid a fear of increasing inflation (Getty Images)

Bitcoin is suffering its largest slide in months.

The lead cryptocurrency nearly dropped down to £33,385 down from a high of £40,973 on Sunday.

Competitors also took a hit with Bloomberg Galaxy Crypto Index – which tracks five cryptocurrencies including Bitcoin – down 23%.

The drop in price comes against a backdrop of chaos on the global market.

Why is cryptocurrency sliding?

A steep rise in bond yields on Thursday suggests a potential acceleration of growth and inflation which has led traders to reconsider their position on riskier assets with stocks in tech shares such as Tesla and Peloton taking a hit.

This has had a knock-on effect for cryptocurrency.

"Risk-on assets are taking a hit at the moment - we're seeing stocks slide and crypto is following," explained Vijay Ayyar, head of Asia Pacific for cryptocurrency exchange Luno in Singapore.

Speaking to Business Insider he said: “the dollar is strengthening, which is a good indication to expect a slide in Bitcoin and crypto."

A bad week for Bitcoin

The rapid increase in bond yields was the latest setback in what has been a tumultuous week for Bitcoin.

The start of this week was marked by a sell-off of the cryptocurrency.

Bitcoin’s value had jumped by 50% following Tesla’s announcement hat it would accept payment in the form of the cryptocurrency.

Comments by Musk may be partially responsible for the drop in value. The weekend before the sell-off he said that the price of Bitcoin did "seem high lol".

US Treasury Secretary Janet Yellen also may have caused owners of the currency to sell-off, saying on Monday that Bitcoin was an "extremely inefficient way of conducting transactions".

Earlier this week Microsoft owner added to the negative sentiment telling Bloomerg television that he wasn’t a fan of the cryptocurrency.

Some have suggested that Bitcoin could be set for a bust akin to the 2017 boom and bust.

What is a bond yield?

A bond yield is the return an investor makes on a bond

Capital.com defines a bond yield as “the annual amount you could receive in interest from a bond, as a percentage of the bond's initial cost. Bond yield is used to compare the potential returns of all kinds of bonds.”

Explaining the importance of bond yields as an indicator, Capital writes: “bond yield curves are closely followed in the financial news. This is because they are seen as an indicator of both the general strength of the market and of particular issuers.”