The price of bitcoin plummeted this week, following news about U.S. President Donald Trump’s pick for Fed Chair, a broader tech stock selloff and fading momentum in cryptocurrency interest. While it stabilized on Friday, the coin remains at its lowest levels since Trump took office. Amid the turmoil, investors may wonder how to proceed. Here, Financial Post breaks down why bitcoin crashed and what investors need to know.

What happened this week with bitcoin?

Bitcoin tumbled more than 15 per cent this week, dipping as low as US$61,000 Thursday evening, amid a broader market selloff driven by

tech stocks

— the Nasdaq Composite index slid by 4.5 per cent this week.

The cryptocurrency since rebounded, to US$70,000 on Friday, though this is still the lowest the cryptocurrency has traded since Trump took office and down from its record high of about US $126,210.

The bitcoin momentum has started to fade out, according to Mehmet Beceren, vice-president and senior market strategist at Rosenberg Research & Associates Inc.

“The deregulation trend on the crypto side created a big hype in the industry and there was a huge piling on to these speculative assets, assuming that the Trump family and their policies will create a big boost for the sector (and) become more mainstream in the industry,” Beceren said.

“But these assets (are) just tokens — they’re like bottle caps or Pokémon cards,” he said. “There’s nothing to them.”

This sharp selloff follows bitcoin’s gradual slide since early January, including a seven per cent drop on Saturday after news broke of Trump’s pick for Fed chair,

Kevin Warsh

. He has been viewed as a supporter of higher interest rates and a tighter balance sheet, while looser monetary policy tends to support investment in assets such as cryptocurrencies.

But Deutsche Bank analysts Marion Laboure and Camilla Siazon wrote in a recent note that bitcoin had been underperforming long before the Warsh nomination. In fact, since October last year, the price of bitcoin has plummeted by nearly 50 per cent.

What triggered the bitcoin selloff?

Paul Pincente, vice-president of digital assets at Purpose Investments Inc., said bitcoin’s collapse on Thursday occurred in tandem with a broader tech stock selloff this week.

“Bitcoin … really acts like a tech stock,” Pincente said. “Whenever a big shift or a big event happens to that sector, crypto will naturally follow.”

The Deutsche Bank analysts said much of bitcoin’s decline has been driven by “massive withdrawals from institutional

exchange-traded funds

,” noting U.S. Spot Bitcoin ETFs saw outflows of more than US$3 billion in January, about US$2 billion in December, and about US$7 billion in November.

“This steady selling in our view signals that traditional investors are losing interest and overall pessimism about crypto is growing,” the analysts wrote.

Bubble concerns have also accelerated, along with stalled progress on regulation. The analysts said bitcoin’s ability to sustainably recover may partially depend on the passage of the U.S. Digital Asset Market Clarity Act, which provides a framework for classifying digital assets and establishes the Commodity Futures Trading Commission as the industry’s main regulator.

Beceren said there is another dynamic at play: crypto treasury companies that hold colossal reserves of bitcoin and issue bonds that institutional investors can purchase.

“The whole game basically plays around the expectation that if the price keeps going up, these bonds will pay up,” he said.

The most well-known of these companies is Strategy Inc., formerly known as MicroStrategy, which entered a “doom loop” in the past four months, Beceren said. Strategy’s latest quarterly report released on Thursday revealed a staggering US$12 billion loss, which Beceren said is comparable to banking losses from the 2008 financial crisis.

“That created a huge fear in the market, and people started to take off their bets,” he said.

What should you do if you hold bitcoin?

As the price of bitcoin stabilizes, some investors might be wondering what they should do next.

Investors need to be careful about the asset’s volatility, Beceren said. “It goes down faster than it goes up.”

However, Pincente advised against making a permanent decision in a temporary panic.

He said it is important to make decisions based on your investment time horizon. For example, someone who is invested for the long term is more likely to view crypto drawdowns as part of the deal.

“This has always been a speculative and risky asset,” said Pincente. “It’s always been super volatile, and that’s kind of the price of admission.”

Should you buy the dip?

Pincente said the first rule for anyone thinking of buying into a bitcoin dip is to not buy more than they can emotionally or financially hold.

The general rule of thumb is to keep crypto investments within one to five per cent of your portfolio. He said this can still provide meaningful boosts, while hedging against sharp volatility.

“If you really understand the space … and you’re comfortable and confident, we’re starting to see some investors or advisers even pushing that up to 10 per cent.”

The second, is to avoid leverage and practice “boring discipline,” or dollar cost averaging, when you set a cadence and put a fixed amount toward your investments.

“What happens then is that your average cost, or your average point of entry, smooths out,” he said.

When it comes to investing in cryptocurrencies in general, it can be difficult to evaluate the good from the bad, he added.

Larger crypto companies, such as the Ethereum Foundation with the ether token, which earn revenue, provide some basis for valuation, Pincente said. On the other hand, the average investor should probably avoid the smaller and more speculative companies, he said.

Beceren advised against investing in treasury companies, or the companies holding cryptocurrencies, in particular.

“In our view, this is still a very risky bet, because these treasury companies are essentially perpetual motion machines,” Beceren said. “This is just Stage 1 of a very risky scenario moving forward.”

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