KEY POINTS

  • Janet Yellen's remarks about cryptocurrencies have shaken the market
  • Yellen has also recognized the role of cryptocurrency in improving the financial system
  • Analysts warn of a long road to recovery

The Bitcoin pullback has finally happened amid concerns about regulatory scrutiny from the new U.S. administration. Some analysts say the price of the benchmark cryptocurrency could even fall to $25,000. 

Bitcoin dropped from $35,500 to $29,000 before closing at $30,855 Thursday, a decrease of almost 13% in one day. The dominant cryptocurrency's price action has shaken the entire market, with alternative cryptocurrencies (altcoins) falling significantly. For example, Ethereum, fresh from its new all-time high the previous day, decreased by 20%. 

Analysts say the comments made by incoming Treasury Secretary Janet Yellen about cryptocurrencies could be a reason for the price action. During her Senate confirmation hearing, she said their use in illicit financing is of "particular concern."

Matt Maley, chief market strategist at asset management firm Miller Tabak, says if the government tries to regulate Bitcoin more, the liquidity could move out of the market. "That could cause a fairly significant drop, even though I think it's going higher long-term," Maley told CNBC.

Yellen, however, also acknowledged cryptocurrencies' potential to improve the efficiency of the financial system. "I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities," she said in a written response to the Senate Finance Committee.

Still, technical indicators show Bitcoin is already due for a pullback. On the weekly Bitcoin chart, the relative strength index is still at overbought levels.

If Bitcoin breaches its Jan. 11 lows, the dominant cryptocurrency may test and fall even beyond $30,000, which is the level it is currently trying to sustain, Maley cautioned.

If it fails, $25,000 is a possible bottom, Maley said. At that level, Bitcoin would have already retraced around 50% from January's price peak. "Traders are going to have to be very, very nimble, and long-term investors are going to have a very strong stomach," the analyst warned.

Treasury secretary nominee Janet Yellen has urged lawmakers to press ahead with a new US rescue package Treasury secretary nominee Janet Yellen has urged lawmakers to press ahead with a new US rescue package Photo: GETTY IMAGES NORTH AMERICA / ALEX WONG