Tesla stock is "heavily tied" to bitcoin following its $1.5 billion purchase of the cryptocurrency last month, Wedbush analyst Dan Ives said in a note on Tuesday.

While Tesla's purchase of bitcoin represents a "small amount" of the company's overall cash position, perception is reality on Wall Street, with investors starting to tie bitcoin and the EV manufacturer "at the hip," Ives said.

Tesla likely made paper profits of $1 billion on its January purchase of bitcoin, more than the profits it made on its underlying car business in 2020, according to Ives.

"There is a lingering worry that the bitcoin sideshow could overshadow the overall EV growth story playing out for Tesla in 2021 and beyond in the eyes of the street," Ives explained.

In recent days, the swift drop in bitcoin has likely helped fuel a decline in shares of Tesla.

Bitcoin has declined by more than 20% from its recent high of more than $58,000, and shares of Tesla have fallen more than 20% since it announced it purchased bitcoin on February 8.

But bitcoin represents a double-edged sword for Tesla, and could work out for the company in the long-term as more companies embrace the cryptocurrency.

"We continue to believe the bitcoin move was a strategic one for the long-term and will have a ripple impact as Square, Mastercard, MicroStrategy and now Tesla embrace bitcoin," Ives explained.

Cathie Wood of Ark Invest likely agrees with Ives, given that ARK's ETF strategies have been buying the dip in shares of Tesla. Across all of its ETFs, Ark purchased more than 200,000 shares of Tesla amid its decline on Monday, according to Ark's daily trading log.

Wedbush reiterated its Neutral rating on Tesla and maintained its $950 price target for the company.