What happened
Cryptocurrencies took a breather this morning after a nice rally in recent days, as investors digest more macro news and as the electric car maker Tesla (TSLA -3.40%) announced that it had sold much of its Bitcoin (BTC 0.10%) holdings.
Over the past 24 hours as of 9:45 a.m. ET, the price of Bitcoin had fallen more than 5%, the price of Ethereum (ETH -0.76%) had fallen more than 6%, and the price of the meme token Dogecoin (DOGE -1.25%) was down nearly 7%.
So what
The European Central Bank (ECB) caught the market off guard this morning by announcing that it would hike its key benchmark interest rate by 50 basis points (0.5%). The ECB has kept rates negative since 2014, so the move is a big deal, but investors didn't think the ECB would start with a half point. Riskier assets including cryptocurrencies have not fared well amid the rising interest rate environment this year, as rising interest rates make safer assets yield more, which then essentially demands more of riskier assets typically trading at larger valuations.
Image source: Getty Images.
But another reason for crypto's sell-off today could be due to the revelation that Tesla has sold 75% of its Bitcoin holdings, which is equivalent to $936 million. Tesla initially invested $1.5 billion in Bitcoin early in 2021.
On Tesla's second-quarter earnings call yesterday, CEO Elon Musk attributed the sale of Bitcoin to uncertainty surrounding how COVID-19 lockdowns would play out in China, which had imposed months-long lockdowns in several major cities earlier this year.
"So it was important for us to maximize our cash position, given the uncertainty of the COVID lockdowns in China. We are certainly open to increasing our Bitcoin holdings in the future, so this should not be taken as some verdict on Bitcoin. It's just that we were concerned about overall liquidity for the company, given COVID shutdowns in China," said Musk.
"And we have not sold any of our Dogecoin," Musk added.
Later in Tesla's earnings call, Musk also essentially punted when asked by an analyst about how he views Bitcoin as a hedge against inflation, a widely debated topic, and as a long-term asset.
"Cryptocurrency is a sideshow to the sideshow," said Musk, adding that "cryptocurrency is not something we think about a lot" and "we're neither here nor there on cryptocurrency."
Now what
Musk's explanation for selling Bitcoin seems somewhat reasonable, but there's no doubt that the famous entrepreneur has the power to move crypto markets. After all, Tesla's decision to purchase Bitcoin definitely helped move the token higher, and Musk played a huge role in driving up the price of Dogecoin last year with his support of the meme token on social media.
Despite the sale, I still do see strong long-term potential for Bitcoin and Ethereum, both of which I expect to be around and stay relevant, although they could definitely go lower in the near term.
Bitcoin is the pioneer of blockchain technology and cryptocurrencies and continues to gain more exposure in the mainstream financial system. Ethereum with its smart-contract technology has many real-world use cases, and the network should improve after a set of ongoing upgrades is completed.
Dogecoin was created as a joke and does not seem to have any real-world use case or technical advantage over other cryptocurrencies, which is why I have no interest in investing in the token.
