An announcement by Tesla on Feb. 8 that it had bought $1.5 billion of bitcoin and that it would accept it as payment for its electric vehicles has been one factor behind its surging price this year.
But Tesla Chief Executive Musk has faced pressure about the environmental impact of bitcoin since the announcement. The cryptocurrency relies on computers competing to solve elaborate maths problems, which uses huge amounts of electricity.
"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," Musk tweeted.
Musk's comments roiled markets even though he said Tesla would not sell any bitcoin and would resume accepting it as soon as "mining" for it transitioned to more sustainable energy.
In a second tweet on Thursday, Musk denounced the "insane" amount of energy used to produce bitcoin, which momentarily pushed bitcoin lower.
The digital currency is still trading about 30% higher than it was before Tesla's announcement in February.
Jeffrey Wang, Vancouver-based head of Americas at Amber Group, a cryptocurrency service provider, said broader selling of risk assets in traditional markets was another factor behind Wednesday's bitcoin plunge.
"I don’t think everything is selling off just because of this news. This was kind of the straw that broke the camel’s back in terms of adding to the risk sell-off," Wang said.
The S&P 500 dropped 2.1%, and the Nasdaq Composite lost 2.7% on Wednesday.
Bitcoin has struggled since hitting a record $64,895.22 in mid-April, dropping to the cusp of $47,000 just 11 days later before hovering around $58,000 since the start of May.
At current rates, bitcoin mining devours about the same amount of energy annually as the Netherlands did in 2019, data from the University of Cambridge and the International Energy Agency showed.
"Environmental matters are an incredibly sensitive subject right now, and Tesla’s move might serve as a wake-up call to businesses and consumers using Bitcoin, who hadn’t hitherto considered its carbon footprint," Laith Khalaf, an analyst at AJ Bell, said.
Tesla shares were down 1% in pre-market trading. The biggest U.S. cryptocurrency exchange, Coinbase, was down 5% COIN.O . Smaller cryptocurrencies were less affected by the news.
"Interestingly enough, altcoins are performing well," said Justin d'Anethan, sales manager at Hong Kong-based head of exchange sales at Diginex, a digital asset company.
"The reason given in the tweet is fossil fuel use for the mining of BTC, but most cryptocurrencies have already found more efficient ways to do that and therefore outperformed."
Bitcoin’s share of the total market capitalisation of all cryptocurrencies dropped to 42%, its lowest since June 2018.
Makoto Sakuma, a researcher at the NLI Research Institute in Tokyo said: "The issue (of huge energy use by bitcoin miners) has been long known so it's nothing new, but taken together with Musk's recent comments about dogecoin, his latest comments seems to suggest his passion for cryptocurrencies may be waning."
Cryptocurrency dogecoin lost more than a third of its price on Sunday after Musk, whose tweets had stoked demand for the token earlier this year, called it a "hustle" on the "Saturday Night Live" comedy show.
By Tuesday, however, he was asking his followers on Twitter if they wanted Tesla to accept dogecoin. (Reporting by Kevin Buckland in Tokyo and Alun John in Hong Kong; Additional reporting by Hideyuki Sano in Tokyo and Elizabeth Howcroft in London; Editing by Stephen Coates, Sam Holmes, Alexander Smith, Peter Graff)