Bitcoin recovered from three-month lows below US$6,000 in choppy trading on Tuesday, but worries lingered about a global regulatory clampdown and moves by banks to ban buying bitcoin with credit cards.
Investors swooped in after a steep fall. On the Luxembourg-based Bitstamp exchange, bitcoin hit US$5,920, its lowest since mid-November, before recovering to above US$7,000.
It was last at US$7,260 in late morning trading in New York, up roughly six per cent on the day.
"The recent weakness in bitcoin stems from tightening liquidity and near-term profit taking, and does not reflect a change in the long-term outlook for the digital currency," said John Sarson, managing partner at Blockchain Momentum LP and ETF Momentum Investing in Indianapolis.
"We view this selloff positively as we believe that lower prices will entice institutions to act quickly to adopt enhanced digital asset services before prices recover."
Bitcoin has slumped in recent sessions as a risk-off mood spread across financial markets. It has fallen about 70 per cent from its peak of almost US$20,000 in December and was down nearly 50 per cent so far this year.
The original cryptocurrency gained more than 1,300 per cent last year.
Other digital currencies also rose after posting steep losses the last few weeks. Ethereum, the second-largest by market value, was up 1.8 per cent over the past 24 hours at US$751.48, while the third-largest, Ripple, edged up 0.5 per cent at 73 U.S. cents, according to cyrptocurrency tracker coinmarketcap.com.
The gains came amid a U.S. Senate hearing on virtual currencies in which J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC) and Jay Clayton, chairman at the Securities and Exchange Commission (SEC) have been testifying.
The Senate is examining the role of the SEC and CFTC in regulating virtual currencies.
Clayton in testimony on Tuesday said Congress may need to change financial laws to better regulate cryptocurrencies.
After a massive run-up last year, in which investors across the world piled into the market, cryptocurrency prices have skidded lower while regulators have stepped up warnings about the risk of investing in them.
Regulatory clampdowns in South Korea and India and an advertising ban by Facebook have hit sentiment. Several banks said in recent days that they were banning customers from buying cryptocurrencies with credit cards.
Still, many cryptocurrency backers said regulation should be welcomed and short-term price volatility is to be expected for a new market.
Iqbal Gandham, managing director at trading platform eToro said his company had seen a drop in trading interest from investors in recent weeks amid the selloff, but that interest remained far higher than before the fourth quarter of last year.
The plunge has come during a heavy selloff in global stock markets in recent days, undermining views that bitcoin's price moves are generally uncorrelated to those of other asset classes.
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Tommy Wilkes in London; Editing by Meredith Mazzilli)