Bitcoin Drops as Elon Musk Suggests Prices 'Seem High'

Bitcoin prices lose ground as Elon Musk suggests prices seem high.
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Bitcoin was lower Monday after Tesla  (TSLA) - Get Report Founder and Co-Chief Executive Elon Musk suggested that prices for the cryptocurrency seemed high and market observers raised concern about that market overheating.

Bitcoin at last check was down 7.3% to $53,208.

Musk, whose electric-vehicle company had made a $1.5 billion investment in bitcoin earlier this month, suggested on Twitter on Saturday that bitcoin prices “seem high."

Bitcoin’s market value soared to $1 trillion for the first time on Friday.

“Mostly it is down to a massively long speculative market, combined with Elon Musk saying it looks a bit overdone,” Jeffrey Halley, senior analyst at Oanda Corp., said, according to Bloomberg.

Bitcoin’s rise has been fueled in part by speculators betting it will be the dominant digital currency. But it's also been driven by institutional investors who are buying into the idea that bitcoin specifically is “digital gold” -- an asset class that has equal if not greater chances of retaining its value, and in turn being a hedge against risks such as inflation.

On Friday, Musk defended the company's bitcoin investment, saying in a tweet that it is “simply a less dumb form of liquidity than cash,” adding that the electric vehicle maker’s decision isn’t “directly reflective of my opinion.”

"To be clear, I am not an investor, I am an engineer,” Musk said on Twitter. "I don’t even own any publicly traded stock besides Tesla.”

JPMorgan Chase strategist Nikolaos Panigirtzoglou said liquidity for the digital coin was lower than that for the S&P 500 Index and gold, meaning “even small flows can have a large price impact,” Bloomberg reported.

Cash use was already on the decline before COVID-19, and the pandemic has fueled demand for fast and convenient digital payments, JPMorgan Chase said in a report. 

The pandemic has boosted demand for digital services and also for alternative currencies as multiple rounds of stimulus, accommodative monetary policy, and excess savings have boosted the money supply, leading to record inflows into bitcoin investment vehicles, JPMorgan said.

The 27% rise in bitcoin prices in the week of Tesla’s announcement follows a more than quadrupling in bitcoin prices during 2020, the investment bank said.

Last week, Purpose Bitcoin ETF, the first North American exchange-traded fund for bitcoin, began trading. The U.S. dollar security of Purpose Bitcoin at last check was off 2.6% at $10.30.

While bitcoin has risen more than fivefold over the past year, it has periodically plunged during its 12 years of existence. 

Skeptics warn that Bitcoin is more a vehicle for speculation. They argue that it doesn’t meet the basic definition of a currency since it’s barely used for legitimate commerce.