Why Bitcoin, Ethereum and Dogecoin are falling today

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 9.78%) announced that it had sold a lot of it Bitcoin (BTC -0.52%) inventory.

During the last 24 hours at 09:45 ET, the price of Bitcoin had fallen more than 5%, the price of Ethereum (ETH 4.40%) had fallen more than 6%, and the price of the meme token Dogecoin (DOGE 1.45%) went down almost 7 percent.

So what

The European Central Bank (ECB) surprised the market this morning by announcing that it would raise its benchmark interest rate by 50 basis points (0.5%). The ECB has kept interest rates negative since 2014, so the move is a big deal, but investors didn’t think the ECB would start with half a point. Risky assets, including cryptocurrencies, have not fared well in the rising interest rate environment this year, as rising interest rates make safer assets yield more, which then essentially demands more of the riskier assets that typically trade at higher valuations.

Image source: Getty Images.

But another reason for crypto’s selloff today could be due to the revelation that Tesla has sold 75% of its Bitcoin holdings, which equates to $936 million. Tesla initially invested $1.5 billion in Bitcoin in early 2021.

On Tesla’s second-quarter earnings call yesterday, CEO Elon Musk attributed the sell-off in Bitcoin to uncertainty over 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 surrounding the COVID shutdowns in China. We are certainly open to increasing our Bitcoin holdings in the future, so this should not be taken as a judgment on Bitcoin. It’s just that we were concerned about overall liquidity for the company, given the COVID shutdowns in China,” Musk said.

“And we haven’t sold any of our Dogecoin,” Musk added.

Later in Tesla’s earnings call, Musk also essentially said when asked by an analyst how he views Bitcoin as a hedge against inflation, a much-debated topic, and as a long-term asset.

“Cryptocurrency is a sideshow to the sideshow,” Musk said, adding that “cryptocurrency is not something we think about much” and “we are neither here nor there on cryptocurrency.”

What now

Musk’s explanation for selling Bitcoin seems somewhat reasonable, but there is no doubt that the famous entrepreneur has the power to move crypto markets. After all, Tesla’s decision to buy Bitcoin definitely helped move the token higher, and Musk played a big role in driving up the price of Dogecoin last year with his support for the meme token on social media.

Despite the selloff, I still see strong long-term potential for Bitcoin and Ethereum, both of which I expect to be around and remain relevant, although they could definitely go lower in the short 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 are completed.

Dogecoin was created as a joke and doesn’t seem to have any real use case or technical advantage over other cryptocurrencies, which is why I have no interest in investing in the token.