Because the smith could likely still sell it for a lot of money to keep his business afloat??????
This is not hard to figure out. Just because you do not see the reason does not mean there is no valid justification.
Wrong.
The dwarf was already on the verge of bankruptcy because he can't match the prices of the villain's shop.
One sword wouldn't have made a difference and he probably wouldn't have been able to sell it for a good price after the competition. Remember, the villain is pushing for high quality products with super-cheap price. And the customers fell for it since there is no regulation (and probably no public awareness) in their world about price dumping.
Granted, he can't do this forever, but this is apparently the last opposition he had, and this competition was the last chance the dwarf had to make a come-back. And he was going to lose it, and his last hopes along with it, had the villain not stolen the sword and bragged about his own.
This was the whole setup and the reason the blacksmithing competition is critical.
So he is a dumb villain. Probably the type blinded by greed and arrogance.
However, this is not necessary a bad character in the sense that people do stupid things out of arrogance even in real life.
Even today, there are real-life examples of people who just can't shut up even as they face legal troubles because of their big mouth.