Bitcoin has put together an astonishing bull run since the early summer of 2020. The top digital currency has shattered the all-time highs it posted during the bull run of 2017. Bitcoin challenged the US$60,000 mark in the latter half of February. However, it has since fallen back below US$50,000. What is behind the recent fall in cryptocurrencies? Should investors buy the dip? Or are digital currencies about to face down a sharp correction, as we saw in the aftermath of the 2017 bull run?
Bitcoin: Why it hit turbulence in late February In early February, Tesla founder Elon Musk said that he had invested $1.5 billion in Bitcoin. This lit a fire under the already red-hot crypto market. Reportedly, Tesla made a $1 billion profit from Musk’s big bet on Bitcoin. This exceeds the profit Tesla made from its electric vehicles in the previous year. Musk has demonstrated his ability to move markets using his huge social media reach. However, he is not the only billionaire with a microphone and eyes on the crypto space.
Warren Buffett has called Bitcoin “rat poison” in previous interviews. He has said that the digital currency holds no intrinsic value. Bill Gates, the founder of Microsoft (NASDAQ:MSFT) and an influential voice in global health, warned that investors should “watch out” when it comes to Bitcoin’s high valuation. The critiques did not stop there. Janet Yellen, former chairperson of the Federal Reserve and current U.S. Secretary of the Treasury, called Bitcoin “extremely inefficient.”
These bearish comments appeared to drive down the price of Bitcoin in the days that followed.
Does the crypto story in 2020/2021 mirror the 2017 bull run? Bitcoin became a household name during the 2017 bull run. Institutional and retail investors flocked into the crypto space, and many were excited by the development of the blockchain. This bull market came to a screeching halt in early 2018. Bitcoin and its peers found themselves in the crosshairs of international regulators.
Crypto bulls should be encouraged by the developments in 2020 and early 2021. Unlike 2018, Bitcoin has been embraced by regulators, top payment processors, and brokerage firms. PayPal adopted the top digital currency in 2020, and WealthSimple started to offer Bitcoin on its platform. Last month, Canada launched the very first Bitcoin-focused exchange-traded fund (ETF). This mainstream embrace should provide a stiffer floor for Bitcoin and its peers going forward.
Should you jump into Bitcoin today? Bitcoin may be more robust than it was in early 2018, but that does not mean it does not carry massive risk. Canadians who want to stash the Purpose Bitcoin ETF in their TFSA or RRSP in March should exercise caution. Shares of this ETF were down 1.7% in early afternoon trading on March 2. Hut 8 Mining, a top crypto mining firm, has seen its stock succumb to these headwinds in recent weeks. However, its shares are still up over 180% in 2021 so far.
In December 2017, I’d discussed the battle between crypto and alternative assets like gold and silver. Gold also rattled off record highs in 2020. However, the yellow metal has sharply corrected in late 2020 and early 2021. I’m not eager to jump on the Bitcoin train considering its sky-high valuation right now.
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Teresa Kersten, an employee of LinkedIn (NYSE:LNKD), a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. 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 Microsoft, PayPal Holdings, and Tesla and recommends the following options: long January 2022 $75 calls on PayPal Holdings.
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