Cryptocurrency trading platform Coinbase recently became a publicly traded company on April 14, 2021. The move could create a massive shift in the landscape and possibly make it worth more than most major banks across North America.
Bitcoin rallied again amid the development in the cryptocurrency space, rising above the US$63,500 mark earlier in April. However, Bitcoin is currently undergoing a sharp pullback in its valuation.
At writing, a single Bitcoin is worth US$55,281.70. I will discuss what led to such a significant crash to help you determine whether you should jump on the dip or practice caution.
Why a blackout caused a pullback
China’s Xinjiang region went through a massive blackout over the April 17 and 18 weekend, leading to many speculating that it triggered the sharp decline in Bitcoin’s valuation. According to BitInforCharts, the computing power fueling the blockchain network’s security dropped from 157 exahashes per second on April 15 to 105 exahashes per second.
The sudden hash rate drop by a third could potentially expose the network to attacks. However, experts are speculating that people who sold their Bitcoin due to this might have acted too cautiously. There may be other headwinds in the cryptocurrency world that could become a more significant obstacle for Bitcoin.
Why Bitcoin has sustained its bull run
Bitcoin has managed to sustain this bull run to newer heights for several reasons. The rise of interest from institutional inventors, top payment processors, and brokerages like WealthSimple has played a major role. The TSX also saw the launch of the world’s first Bitcoin-centric Exchange-Traded Fund (ETF) called Purpose Bitcoin ETF (TSX:BTCC.B) in February.
At writing, the Bitcoin ETF is up 4.06% from its valuation since its inception. Purpose Bitcoin is an ETF that holds only one asset: Bitcoin.
TFs typically provide investors with exposure to a basket of securities trading on various stock exchanges, aligning with different investment goals. There have been other Bitcoin-related securities on the TSX, but Purpose Bitcoin ETF is unlike traditional ETFs and securities. It is effectively a publicly traded Bitcoin proxy that holds your Bitcoin for you in exchange for a fee. The company managing the funds uses cold storage to store the Bitcoin to keep all of it safe.
Buying the ETF effectively means that you are buying Bitcoin on a stock exchange. It is the closest that you can get to owning Bitcoin without buying it and directly holding the cryptocurrency yourself.
The fears of a crackdown
Central bank officials in China recently said that the cryptocurrency market should have more firm regulations as investment vehicles instead of currencies. Cryptocurrency investors have also been scared by the rumors that regulators in the US have plans for digital assets.
Treasury Secretary and former Federal Reserve chairwoman Janet Yellen called Bitcoin extremely inefficient. Rumors have started circulating, suggesting that the Treasury may crackdown on Bitcoin over money-laundering concerns. The CEO of Bitcoin exchange Kraken has also warned that there could be some crackdown on cryptocurrencies.
Bitcoin has had a fantastic bull run that was still riddled with volatility like previous bull runs. However, the cryptocurrency seems to be facing increasing resistance since breaking the US$60,000 barrier in March 2021.
Investors bullish on crypto could use the pullback in Purpose Bitcoin ETF valuation to buy on the dip, provided that the crackdown does not materialize. The pullback in Bitcoin prices due to the blackout might have been overdone, but a global regulatory crackdown could spell bad news for Bitcoin and Purpose Bitcoin ETF investors. It might not be the best time to invest in Bitcoin-related securities right now.
You could consider investing in other securities that offer high-growth backed by fundamentals.
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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 Adam Othman has no position in any of the stocks mentioned.