Bitcoin fell sharply Monday as investors shunned risky assets after Bank of Japan Gov. Kazuo Ueda strengthened expectations for another increase in interest rates later this month.

The move came against a backdrop of concerns about an overvaluation of tech stocks and other risky assets.

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Bitcoin fell 5% to reach a one-week low of $85,663 in early Monday trade, according to LSEG.

The cryptocurrency has dropped significantly since hitting a record high of $126,223 in early October. Further falls could see it reach the seven-month low of $80,553 on Nov. 21, which was partly driven by fears over an artificial-intelligence bubble.

“Bitcoin’s selling pressure shows no signs of letting up,” Victoria Scholar, head of investment at Interactive Investor, said in a note. “It feels like investors, big and small, are feeling very cautious toward cryptos in the short term at least.”

Ueda’s comments added fuel to investors’ risk aversion. Japan’s Nikkei stock index slumped after Ueda said Monday that the BOJ would continue to raise the policy rate and degree of monetary accommodation if the outlook for economic activity and prices is realized.

This strongly suggested an interest-rate rise at the Dec. 19 meeting, Deutsche Bank analysts said in a note.

“This story brings shades of the 2022 meeting just before Christmas when the BOJ lifted its cap on 10-year Japanese government bonds from 0.25% to 0.5%,” they said. “That saw the market spooked a little.”

A sharp decline in volatility last week could also have contributed to bitcoin’s latest falls, XTB research director Kathleen Brooks said in a note.

The VIX, a measure of expected stock market volatility based on S&P 500 index options, fell back below the average for the past 12 months. This might have unnerved some investors who remained concerned about an uncertain outlook into the end of the year, Brooks said.

“Bitcoin tends to be a leading indicator for overall risk sentiment right now, and its slide does not bode well for stocks at the start of this month,” Brooks said.

Write to Renae Dyer at renae.dyer@wsj.com

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