Why Bitcoin plunged on Tuesday

A sharp drop in Bitcoin has extended to miners, too.

Panicked man with his hand on his head with a red Bitcoin symbol and arrow going down.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened 

The news couldn't have been much worse for Bitcoin (CRYPTO: BTC) and cryptocurrencies today. inflation in the U.S. came in higher than expected at 0.1% last month, with core inflation up 0.6%. This was despite investors thinking that inflation may be slowing, which could have opened the door to the Federal Reserve slowing its pace of interest rate increases. 

Shares of Bitcoin-related stocks were trading near their daily lows at 3 p.m. ET. Riot Blockchain (NASDAQ: RIOT) was down as much as 9.8%, Bitfarms (NASDAQ: BITF) had fallen 10.6%, Marathon Digital (NASDAQ: MARA) dropped 10.9%, HIVE Blockchain Technologies (NASDAQ: HIVE) declined 11.3%, and Hut 8 Mining (NASDAQ: HUT) fell as much as 14.6%.

So what 

Bitcoin is down 9.9% as I'm writing to $20,245, which seems bad, but the cryptocurrency is still up 7.4% over the past week. But when Bitcoin drops rapidly, it can often cause Bitcoin mining and related stocks to drop dramatically as well. This happens for two reasons. 

First, Bitcoin miners are generating Bitcoin as revenue, so when the value of Bitcoin drops, their revenue effectively does as well. Second, these companies often hold significant Bitcoin reserves on their balance sheets, so a drop in Bitcoin actually means a loss in value on the balance sheet as well. 

As all of this is happening, Ethereum (CRYPTO: ETH) is moving quickly toward The Merge in the next day or so, which will give the cryptocurrency significant advantages over Bitcoin. The Ethereum blockchain won't be as energy intensive as Bitcoin's and has the smart contract capability that Bitcoin can't compete with. There are a lot of investors who think this will shift value from Bitcoin to Ethereum. 

We have already seen miners on Ethereum's proof-of-work blockchain suffer because they'll have no work to do after The Merge's move to proof of stake. That's the macro trend of all cryptocurrencies, and Bitcoin doesn't have an answer to lower energy usage right now. 

Now what 

Bitcoin, in particular, was supposed to be a hedge against inflation. But that hasn't been the case for at least a year now, and the cryptocurrency trades more like a speculative asset than an inflation hedge

What I would be worried about for Bitcoin miners is a continued decline in Bitcoin's price after The Merge. Ethereum is a compelling alternative with much more functionality as a form of payment and innovation than Bitcoin. And with the focus on energy usage and environmental impact across the technology industry, the more than 99% reduction in energy usage after The Merge will be compelling. 

I don't think Bitcoin miners have a great business model in today's market, and that's what keeping me out of these stocks. They're mainly playing arbitrage against the price of Bitcoin and the cost of mining a Bitcoin. If that arbitrage goes to zero, the entire business model falls apart quickly and once-solid balance sheets could become a liability. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin and Ethereum. The Motley Fool Australia has positions in and has recommended Bitcoin and Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A woman is excited as she reads the latest rumour on her phone.
Broker Notes

Goldman Sachs says this US stock is replacing Tesla in the Magnificent Seven

And no, it's not a tech company. It's in the healthcare sector.

Read more »

A man looking at his laptop and thinking.
Share Gainers

Should I buy Nvidia stock as an Australian investor?

Many Aussies are thinking of jumping on the bandwagon, but they need to think about these issues first.

Read more »

Digital rocket on a laptop.
Broker Notes

Is the Nvidia share price on course to reach US$1,400?

You betcha, says one analyst.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Could Nvidia become the most valuable stock on earth?

Can anything stop the Nvidia stock price?

Read more »

A group of young ASX investors sitting around a laptop with an older lady standing behind them explaining how investing works.
International Stock News

What can ASX investors learn from Warren Buffett's latest buys and sells?

We've just found out what Buffett's been buying and selling recently.

Read more »

electric vehicle such as Tesla being charged at charging station
International Stock News

Why Tesla stock tanked in January

Will the electric vehicle leader see earnings decline once again in 2024?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
International Stock News

Will Nvidia stock be worth more than Microsoft by 2030?

The graphics giant has been growing at a much faster pace than Microsoft, but can it sustain that momentum?

Read more »

Man with hands in the middle of two items with money bags on them.
International Stock News

Stock-split watch: Is Tesla next?

Stock splits are fun. But how much substance there is in Tesla splitting its stock is debatable.

Read more »