What’s behind the bitcoin selloff and what should investors do?

Bitcoin tumbled more than 15 per cent this week, dipping as low as US$61,000 Thursday evening. Photo by Rick Bowmer/AP files

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The price of bitcoin plummeted this week, following news about U.S. President Donald Trump’s pick for Fed Chair, a broader tech stock selloff and fading momentum in cryptocurrency interest. While it stabilized on Friday, the coin remains at its lowest levels since Trump took office. Amid the turmoil, investors may wonder how to proceed. Here, Financial Post breaks down why bitcoin crashed and what investors need to know.

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What happened this week with bitcoin?

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Bitcoin tumbled more than 15 per cent this week, dipping as low as US$61,000 Thursday evening, amid a broader market selloff driven by tech stocks — the Nasdaq Composite index slid by 4.5 per cent this week.

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The cryptocurrency since rebounded, to US$70,000 on Friday, though this is still the lowest the cryptocurrency has traded since Trump took office and down from its record high of about US $126,210.

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The bitcoin momentum has started to fade out, according to Mehmet Beceren, vice-president and senior market strategist at Rosenberg Research & Associates Inc.

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“The deregulation trend on the crypto side created a big hype in the industry and there was a huge piling on to these speculative assets, assuming that the Trump family and their policies will create a big boost for the sector (and) become more mainstream in the industry,” Beceren said.

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“But these assets (are) just tokens — they’re like bottle caps or Pokémon cards,” he said. “There’s nothing to them.”

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This sharp selloff follows bitcoin’s gradual slide since early January, including a seven per cent drop on Saturday after news broke of Trump’s pick for Fed chair, Kevin Warsh. He has been viewed as a supporter of higher interest rates and a tighter balance sheet, while looser monetary policy tends to support investment in assets such as cryptocurrencies.

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But Deutsche Bank analysts Marion Laboure and Camilla Siazon wrote in a recent note that bitcoin had been underperforming long before the Warsh nomination. In fact, since October last year, the price of bitcoin has plummeted by nearly 50 per cent.

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What triggered the bitcoin selloff?

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Paul Pincente, vice-president of digital assets at Purpose Investments Inc., said bitcoin’s collapse on Thursday occurred in tandem with a broader tech stock selloff this week.

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“Bitcoin … really acts like a tech stock,” Pincente said. “Whenever a big shift or a big event happens to that sector, crypto will naturally follow.”

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The Deutsche Bank analysts said much of bitcoin’s decline has been driven by “massive withdrawals from institutional exchange-traded funds,” noting U.S. Spot Bitcoin ETFs saw outflows of more than US$3 billion in January, about US$2 billion in December, and about US$7 billion in November.

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“This steady selling in our view signals that traditional investors are losing interest and overall pessimism about crypto is growing,” the analysts wrote.

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Bubble concerns have also accelerated, along with stalled progress on regulation. The analysts said bitcoin’s ability to sustainably recover may partially depend on the passage of the U.S. Digital Asset Market Clarity Act, which provides a framework for classifying digital assets and establishes the Commodity Futures Trading Commission as the industry’s main regulator.