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Why Did Bitcoin Crash Over the Weekend?

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Last week, I’d discussed the debut for Coinbase on the NASDAQ. Its sharp climb illustrated once again the excitement swirling around the cryptocurrency space. Bitcoin had railed off a new record, rising above US$62,000 earlier in April. The price of bitcoin was down below the US$55,000 mark in late morning trading on April 19. Today, I want to look at what is behind the crash in crypto prices. Should investors look to jump on the dip once again? Let’s dive in.

Why bitcoin dropped sharply over the past weekend

China’s Xinjiang region suffered a widespread blackout over the weekend. Many speculated that this triggered the sharp drop in bitcoin’s price. According to BitInfoCharts, the computing power behind the network’s security saw a drop from 157 exahashes per second on April 15 to just 105 exahashes per second – down 33%. A lower hash rate can expose the bitcoin network to potential attacks, but experts speculate that those who sold in response to this drop may have been overcautious.

The crypto market had other headwinds beside a technical mishap. Back in March, I’d discussed why bitcoin and crypto had sustained this bull run. Institutional investors, top payment processors like PayPal, and brokerages like WealthSimple have rushed to adopt digital currencies. In February, Canada launched the very first exchange-traded bitcoin ETF: the Purpose Bitcoin ETF (TSX:BTCC.B). The ETF is only up 2.5% since its inception. However, the shadow of regulation is looming.

Is a crackdown on crypto coming?

China’s central bank officials recently said that the crypto market should be more firmly regulated as “investment vehicles” or “alternative investments” rather than as “currencies.” Officials said that they aimed to “make sure that speculation in these assets will not create serious financial risks”.

Crypto investors have also been spooked by rumours that regulators in the United States have their eyes on digital assets. Earlier this year, Treasury Secretary and former Federal Reserve chairwoman Janet Yellen called bitcoin “extremely inefficient.” Recent rumours suggest that the Treasury may crackdown on bitcoin over money laundering concerns. Jesse Powell, CEO of the bitcoin exchange Kraken, warned that they could be “some crackdown” on crypto.

Other crypto enthusiasts have been quick to dismiss the murmurs. It is not hard to see why. Bitcoin and crypto has enjoyed significant mainstream support over the past year. Indeed, some regulations may work to legitimize digital assets rather than snuff out their momentum. In its early days, bitcoin and other cryptos had seen use in darker circles. The blockchain analysis firm Chainanalysis suggests that illicit activity has accounted for just 0.34% of crypto transaction volume last year.

How should investors react?

Bitcoin has experienced volatility over the course of this stunning bull run. However, it does appear to be encountering some resistance after it broke above the US$60,000 mark in March. If a global regulatory crackdown is forthcoming, crypto investors will need to brace for some stormy conditions ahead.

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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. The Motley Fool owns shares of and recommends PayPal Holdings and recommends the following options: long January 2022 $75 calls on PayPal Holdings.

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