What happened

About a month ago, Colonial Pipeline was attacked with ransomware by a group we now know is called DarkSide. The fuel-supply chain for the Eastern U.S. faced disruption, so the company reportedly elected to pay the nearly $5 million ransom in popular cryptocurrency Bitcoin (BTC 0.50%) to quickly return to normal operations.

But the general public lamented the loss. There was no hope of catching the bad guys because Bitcoin is completely untraceable. Or is it?

According to a press release from the Department of Justice yesterday, U.S. federal authorities have recovered 63.7 bitcoins, worth over $2 million, and this appears to have caused a sell-off in the cryptocurrency market. According to CoinDesk, the price of Bitcoin has plummeted roughly 12% over the past 24 hours. And Bitcoin stocks like Marathon Digital Holdings (MARA -7.02%), Riot Blockchain (RIOT -8.35%), Grayscale Bitcoin Trust (GBTC -1.20%), and Grayscale Digital Large Cap Fund (GDLC -3.83%) are all down as a result. As of noon EDT, these were down 8%, 7%, 11%, and 13%, respectively.

A frustrated person sits in front of laptop while rubbing eyes in a dimly lit room.

Image source: Getty Images.

So what

There are a lot of reasons someone might buy Bitcoin. But security is among the reasons many are bullish on cryptocurrencies and blockchains, in general -- people perceive these as untraceable, immutable ledgers. But authorities were somehow able to track down Colonial Pipeline's ransom payment, break in, and recover a large part. This seems to fly in the face of one of the key Bitcoin tenets and is the reason Bitcoin and other cryptocurrencies are down so sharply today.

But perhaps there's a fair bit of misunderstanding surrounding this situation. Bitcoin is stored in Bitcoin wallets, and these wallets have addresses. People can send and receive bitcoins if they know each other's addresses.

However, each wallet comes with a set of keys -- an assigned password so to speak -- to keep things safe. But storing keys in a safe place has always been a problem. Those who hold bitcoins are urged to hide their keys, lest someone steal them.

It's not yet apparent how the FBI got hold of DarkSide's keys. And with the keys, it obtained a warrant to seize the bitcoins. But here's the thing: The Bitcoin blockchain ledger is public information. You can see how much is being sent and to which addresses. You just don't know the identity of the person who owns the Bitcoin wallet. For example, I just watched a roughly $200,000 transaction go through by looking in the Explorer section of Blockchain.com.

Because the ledger is public, it was relatively easy to track Colonial Pipeline's payment to the right address. How the FBI got DarkSide's keys is another matter. But either way, nothing was "hacked" with the Bitcoin blockchain network itself.

The transaction went through like it's supposed to. Therefore, I believe it's still fair to say that Bitcoin is a secure network. Whether your personal Bitcoin wallet is secure, however, is another matter.

Bitcoin may or may not be down because of confusion surrounding this issue. But either way, it is down. And that's why these other Bitcoin stocks are down, as well.

A person holds a golden coin that displays the symbol for Bitcoin.

Image source: Getty Images.

Now what

For funds like Grayscale Bitcoin Trust and Grayscale Digital Large Cap Fund, their values are directly tied to the cryptocurrencies they hold. The former holds only Bitcoin and is therefore 100% tied to Bitcoin. The latter holds Bitcoin, Ether, Bitcoin Cash, Litecoin, and Chainlink. But 65.5% of its holdings are Bitcoin, so it's still very much tied to this single cryptocurrency. Moreover, alt-coins like these others have historically gone up and down with Bitcoin, so it's unlikely they'll rise significantly while Bitcoin is going down.

Turning to Bitcoin mining stocks, production has been increasing for companies like Marathon Digital and Riot Blockchain. For example, Marathon Digital mined just 50 Bitcoins in January but almost 227 Bitcoins in May. But this didn't just happen -- both companies have been purchasing and installing new mining equipment to increase production. The result is more Bitcoin, but a side effect is higher operating costs.

Both Marathon Digital and Riot Blockchain intend to continue installing new mining rigs through 2021 and into 2022 under the assumption that the price of Bitcoin will continue rising. But this is a risk to the business completely outside their control.

We don't know what the exact breakeven price is for these companies, but if Bitcoin keeps falling at this rate (now down almost 50% from its April high) both companies risk mining Bitcoin at a loss -- which obviously wouldn't be good. 

Therefore, if you're a long-term investor with either Marathon Digital or Riot Blockchain, it doesn't really matter how well they're managed if Bitcoin doesn't start heading back up. That's the most important thing to watch going forward.