Bitcoin Drops 12%. Is This a Buying Opportunity?

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Bitcoin's lost its shine for Elon Musk, but should you buy?

The price of Bitcoin has dropped 12% in the past 24 hours after Tesla CEO Elon Musk said the firm would no longer accept Bitcoin purchases.

Tesla's move was based on a concern about Bitcoin's carbon footprint. "We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel," he tweeted.

Musk's carbon warning is not new. As Bitcoin rises in price, it becomes more profitable to mine and more companies invest in more computer power to do so. Unfortunately, this also makes it even less energy efficient. Cambridge University research shows Bitcoin currently uses about as much energy each year as big countries like Egypt or Malaysia.

It is, however, a significant U-turn for Tesla. Only a month ago, during the company's Q1 results, Tesla's CFO Zachary Kirkhorn said the Bitcoin investment had "proven to be a good decision."

The Bitcoin rollercoaster

Cryptocurrencies are known for their high volatility, which is why it's advisable to only invest money you can afford to lose. It's not uncommon to see rises and losses of over 10% in a single day.

Bitcoin surpassed the $50,000 mark in February and reached an all-time high of over $64,000 in April. The rise was partly stimulated by Tesla's announcement that it had invested $1.5 billion in Bitcoin -- and that it planned to accept the digital currency as a payment form.

Since then, Bitcoin's price has continued on an upward trend. That said, Coinmarketcap data shows several notable dips:

  • On Feb. 22, Bitcoin fell 18% to $47,437 after Treasury Secretary Janet Yellen called it "highly speculative" and "extremely inefficient."
  • On April 17, Bitcoin fell 10% to $54,900 after Turkey banned cryptocurrency payments.
  • On April 22, Bitcoin fell 10% to $49,430 on fears that President Joe Biden's capital gains tax plans would affect cryptocurrencies.

Other popular cryptocurrencies, such as Ethereum (ETH), Binance Coin (BNB), and Dogecoin (DOGE), also fell today due to market concern that Musk might be losing his crypto enthusiasm.

Indeed, the only cryptocurrency in the top 20 by market cap that has seen gains in the past 24 hours is Cardano (ADA), widely considered to be a more environmentally-friendly digital currency.

Is this a buying opportunity?

If you've been considering buying Bitcoin, dips like this one can offer the opportunity to buy at a discount. However, it's important to understand the risks -- don't buy in just because the price is lower today.

It's like buying something you wouldn't otherwise have bought during your weekly grocery shopping, just because it's on sale. Rather than scoring a money-saving bargain, you've just spent unnecessary money. And though Bitcoin's price has risen over 400% in the past year, there's no guarantee it will continue to go up, especially in the short term.

Bitcoin is the world's first and biggest digital currency. Some investors, like billionaire Mark Cuban, believe it is a form of "digital gold" -- something that will hold its value and appreciate over time.

Some investors, including The Ascent's parent company, The Motley Fool, have invested in Bitcoin because they believe in the currency's long-term potential. As we saw today, its price may fall for a number of reasons. If you invest, do so because you are convinced by the potential of both blockchain technology and Bitcoin to perform in the coming five to 10 years.

Be aware that other investors believe this is a speculative bubble, and that Bitcoin will lose most -- or all -- of its value if the bubble bursts. When considering your investment choices, always weigh the risks.

It's also important to minimize any additional risks in buying cryptocurrency. For example, you can use a top cryptocurrency exchange or brokerage to reduce the risk your Bitcoin will be stolen. And make sure you use secure passwords and enable two-factor authentication to protect your account.

The decision to buy Bitcoin should depend a lot on your risk tolerance and individual investment strategy. Just because Elon Musk has changed his mind about Bitcoin doesn't mean you have to follow suit.

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