Bitcoin recovered from the sharpest sell-off in over a year, an early indication of impending volatility across all asset markets, as investors weigh the prospects of military escalation in the Middle East.

The largest cryptocurrency advanced by 3.9% to $64,400 at 8:50 AM (local time) in London on Sunday, after having surged by as much as 8.3% earlier. Smaller currencies like Polkadot and Uniswap recorded rallies above 10%.

Iran launched aggressive unmanned aircraft and missiles against Israel in apparent retaliation for a strike in Syria that killed top Iranian military leaders, pushing the conflict in the region into a new dangerous phase. With Iran's action taking place while most markets were closed, crypto market traders found themselves in the unusual position of being among the first to react to a major geopolitical event.

"More investors than usual may choose to express their views on the market through cryptocurrencies," said David Lawant, head of research at FalconX.

As Israel prepares for an attack, the tension impacted stocks on Friday and boosted safe-havens, such as bonds and the dollar. Data from Coinglass shows that approximately $1.5 billion in bullish bets on cryptocurrencies were liquidated on Friday and Saturday, one of the heaviest two-day liquidations in at least the last six months.

The leverage was "completely overextended in the last three days, so this caused a significant worsening of prices" in digital assets, stated Ebtikar.

Stock markets in the Middle East were mostly in the red on Sunday. Israeli stocks shed previous gains and traded slightly lower at 8:36 AM London time.

A significant military escalation between Israel and Iran will test the belief that Bitcoin and other assets offer refuge during conflict periods, a view often expressed by supporters of the asset class. When Russia invaded Ukraine in early 2022, cryptocurrencies were at the beginning of a market collapse that lasted until the end of that year.

Bitcoin has retreated from its mid-March record when it was at $73,798. The demand for specialised exchange-traded funds in the US that debuted in January helped the asset reach a historical high, but net inflows into these products have moderated recently.

Cryptocurrency speculators are awaiting the so-called Bitcoin halving, which will cut the new supply of the token in half and is expected around April 20th.