It’s been a crazy 24 hours for some of the biggest cryptocurrencies in the world. Bitcoin (BTC 4.19%) peaked at $68,800 in early trading on Tuesday, only to crash to 61,400 five hours later. As I’m writing at 11 a.m. Wednesday, its price is hovering around $66,500 and seems to have stabilized.
Unsurprisingly, Ethereum (ETH 6.41%) followed a similar path, peaking at $3,805 in early trading Tuesday, falling to $3,360, and now trading at $3,800 again. Dogecoin (DOGE 3.82%) slid from $0.188 down to $0.132, but is now back up to $0.162.
Bitcoin’s flash crash
The rapid drop in Bitcoin on Tuesday was driven by some profit-taking by traders, which was natural after its big run-up. CoinDesk also reported that Bitcoin miners were also seen selling some tokens to lock in profits in their business.
Many Bitcoin miners keep the crypto on their balance sheets for extended periods, which gives them leveraged exposure. But that’s only valuable if they eventually take profits.
The blockchain itself exposes some of the inner workings of the crypto market. Tracking movements on the blockchain can tell when certain actors are moving Bitcoin to exchanges or making decentralized sales. And that information can be shared extremely quickly.
The ETF craze continues
Funds flowing into Bitcoin ETFs continue to keep the market afloat — the BlackRock iShares Bitcoin ETF (IBIT 8.41%) pulled in $778 million on Tuesday alone. That fund now holds 183,000 Bitcoin and is one of the biggest owners of the token in the world.
As money continues flowing into ETFs, the buying pressure pushes Bitcoin’s price higher, and because it is the leading crypto, other tokens follow in its wake.
But that may be the most bullish news for Ethereum and Dogecoin. It has now been proven that there’s investor interest in owning cryptocurrencies through ETFs, and Ethereum and Dogecoin will likely be the next ones to get ETFs approved. They have two of the biggest market caps in the crypto industry and are widely held by investors.
What’s holding the industry back is that such funds require regulatory approval by the Securities and Exchange Commission, which has been reluctant to give it. But there are several court cases ongoing that could provide clarity on what is and isn’t a security. Decisions in those cases could lead to approval for more crypto ETFs.
Caution is needed in crypto
The recent rise in cryptocurrency prices has been driven almost entirely by speculation and inflows of funds into coins and ETFs over the last few months. Both trends can reverse just as quickly as they arose, so investors need to be cautious.
For example, in 2021, values surged, only to come crashing down to earth in 2022. The prices of Bitcoin, Ethereum, and Dogecoin have moved with a significant level of correlation to growth stocks — and valuations of those equities are getting stretched to a point that their rise may not be sustainable.
This crypto bull run may continue, but investors should be prepared for a pullback. If history is any guide, one is likely coming.
Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
