Why Is Bitcoin Down Almost 40% From Its High?

The price of Bitcoin (BTC 2.46%) has fallen roughly 37% from its all-time high as of this writing. And that's about how much it was down when Fool contributors Jon Quast and Travis Hoium discussed it in this video for Motley Fool Backstage Pass, recorded on Jan. 6. 

What's driving the drop with Bitcoin? Surprisingly, cryptocurrencies are behaving more like growth stocks than hedges against inflation. In the short term, this could continue. That's why it's important for long-term investors to focus on the underlying technologies being built in the cryptocurrency industry.

Jon Quast: The third topic that we wanted to talk about here was Bitcoin. I know that not everybody is into cryptocurrency, but a lot of people are, and it has been dropping pretty quickly here lately. Just this year, it's down about 10% the last I checked. Over the past month, down about 20%. Over the last three months, down around 30%. I don't know what it's down from its all-time high now, but it's a pretty sharp pullback, one that I think a lot of people thought that the cryptocurrency bull market was going to continue for a few months longer, and I think a lot of people thought Bitcoin was going to hit $100,000 in 2021, it didn't do that. But as Bitcoin has pulled back, a lot of the other altcoins, all the other coins that aren't Bitcoin, collectively referred to as altcoins, they've been pulling back, that's pretty common.

But one of the things that I noticed was that the hash rate for Bitcoin has come off of its high. The hash rate is basically measuring the computing power of the network, and as more and more miners are added to the network, the hash rate goes up and it hit an all-time high on New Year's Eve actually, over 200 million terahashes per second. After that, it quickly pulled back to around 168 million. That's actually a pretty substantial pullback.

What was going on was Kazakhstan, that is the No. 2 geography country in the world for the hash rate of the Bitcoin network. As miners have gone out of China, they've transitioned to Kazakhstan, where there was cheap energy and a more open government.

Well, turns out that energy prices have spiked, maybe like what we were talking about earlier with the oil prices, and then people protested against the energy prices, and then the entire government of Kazakhstan actually resigned, and that's where we're at now. It looks like some of those miners actually came offline because of the high prices. But, Travis, I don't know, what's going on?

Travis Hoium: That's definitely one thing that's playing into Bitcoin specifically. But I think broadly, you can look at all of these cryptocurrencies are moving in a pretty correlated manner. I covered over the last two days a number of moves in the market, and it's Bitcoin, Ethereum, Solana, Cardano, everything is down or was down, specifically starting yesterday afternoon.

What we're actually seeing is the crypto market act a lot more like a growth stocks market. Specifically, when the Federal Reserve releases minutes like they did yesterday that say, "Hey, we're going to maybe raise interest rates and reduce our bond buying program a little bit more quickly than we might have thought," that impacts growth stocks. As it turns out, it actually impacts Bitcoin and all of these altcoins as well pretty dramatically.

That's what I think we can take away out of the last six months, is Bitcoin and altcoins are not really a hedge to the stock market. It's not really a hedge to inflation, right now at least, it's correlated with growth stocks because it's a very speculative asset. I'm covering a lot of other things like the utility being built underneath, but from a day-to-day basis, I think that's what we're seeing these moves being driven by.