Why Bitcoin Is Down Big Today

The price of Bitcoin has dropped sharply to start the final week of February. How should investors react in the days ahead?

A depiction of the cryptocurrency Bitcoin

Image source: Getty Images.

The cryptocurrency market has encountered major headwinds to open the final trading week of February. It is not the only sector that has been impacted. North American stocks were down broadly in mid-afternoon trading on February 23. Some analysts and economists have been uneasy as this bull market has continued to roar in early 2021. The Buffett Indicator has surged to an all-time high, suggesting that stocks are overheated. Bitcoin, the top crypto by market cap, fell below the US$50,000 mark early today.

What does this mean for the first Bitcoin ETF?

Last week, Canada launched the first-ever Bitcoin exchange-traded fund. This development garnered international attention, as it was the first Bitcoin ETF to be launched on a major exchange.

Purpose Bitcoin ETF (TSX:BTCC.B) was down 11.6% in trading at the time of this writing. Its timing could not have been worse with the crypto market suffering huge losses in its second week on the TSX exchange. Is this the start of a major pullback for Bitcoin and its crypto peers? What is behind this downturn?

Why is Bitcoin plunging today?

Earlier this month, I’d discussed why Bitcoin has built significant momentum since the latter half of 2020. This was due in part to the same factors that led to the rise of gold in 2020. A weak U.S. dollar and plummeting interest rates during the pandemic have spurred investors to look to alternative assets.

Bitcoin and the crypto market have probably benefited the most from mainstream acceptance. The monster 2017 bull market crashed hard in 2018. This was largely due to a sustained attack from international regulators. Cryptos did not build that kind of momentum until 2020 rolled around. PayPal, a top payment processor, announced in 2020 that it would accept Bitcoin on its platform. WealthSimple soon joined the fray and announced that it would allow Bitcoin trading.

The big boon in 2021 came when Tesla founder and CEO Elon Musk announced that his company had poured US$1.5 billion into Bitcoin. This week, we found out that Tesla achieved a US$1 billion profit from this quick dip into crypto. That was larger than the profit it made on its electric vehicles over the past year.

Over the past week, big names have dumped on the crypto space. Janet Yellen, former chairwoman of the Federal Reserve and current U.S. Secretary of the Treasury, called Bitcoin “extremely inefficient.” Bill Gates also warned against betting on the volatile digital currency. These comments have coincided with this sharp dip from all-time highs.

Bitcoin: Should you buy or sell today?

The cryptocurrency market has looked even frothier than regular markets in early 2021. It seemed inevitable that the bull market had to calm down at some point. Now, investors are going to ask themselves familiar questions. Is this a moment to buy the dip?

HIVE Technologies and Hut 8 Mining are crypto mining firms that have benefited hugely from Bitcoin’s bull run. Both stocks were down sharply in mid-afternoon trading. Investors should be very careful with the volatile crypto market right now. In the article above, I’d suggested that Canadians should look to top TSX stocks instead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of and recommends PayPal Holdings and Tesla and recommends the following options: long January 2022 $75 calls on PayPal Holdings.

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