Why Is Crypto Crashing Today: How to Navigate the Crash

The crypto industry still faces sharp declines marked by fear and volatility, despite significant capital from crypto enthusiasts, and a market capitalization peaking at just under$3 trillion in 2021. Although news headlines may attribute market crashes to a few clickbait-worthy factors, better insight comes from understanding the nuances that contribute to downturns.

Explaining a market is always easier in hindsight, but we can still look through multiple layers of events to find the main drivers. In this article, we’ll explore possible causes for crypto crashes and discuss strategies to help you overcome these challenges.

Key Takeaways:

• Crypto crashes may be triggered by low-risk appetite, high leverage, lack of liquidity, and regulatory uncertainty.

• Financial conditions and the traditional global economy can impact the crypto market as investors sometimes reduce exposure to risky assets like crypto.

• Navigating a crypto crash requires careful analysis, risk management and a long-term investment perspective. Buying opportunities may arise, though it’s important to conduct thorough research and exercise caution before investing.

What Is a Crypto Crash?

A crypto crash is a sudden and significant decline in the value of digital assets, such as Bitcoin. Across financial markets, a price drop of 10% or more in a single day is often considered a crash. The ensuing volatility leads to widespread losses and panic selling, similar to stock market crashes. Changes in market sentiment, government regulations, or fraud and security issues can all cause crypto crashes. 

What’s Causing the Current Crypto Crash?

The entire crypto market value has dropped from its high of nearly $3 trillion in 2021 to a value much closer to $1 trillion in 2023. Given the recent decline, investors are looking for the root causes of sell-offs. Crypto crashes have occurred due to instability within the market, in addition to economic factors such as rising inflation and interest rates, which have reduced investor appetite for risk. 

Below, we discuss some of the most common reasons for crypto crashes.

Lack of Liquidity

If the crypto market fails to find buyers, sellers have to keep dropping prices, starting a chain reaction that causes a drop in traded values.

It’s not as common for the two most traded crypto assets, Bitcoin (BTC) or Ether (ETH), to face liquidity issues. However, less popular tokens often see price spikes that are followed by steep crashes. When the Terra ecosystem collapsed, the resulting liquidity crunch caused a catastrophic loss of value in the larger crypto market.

Regulatory Uncertainty

Governments and regulatory bodies worldwide are still grappling with how to approach the decentralized nature of cryptocurrency. Regulatory authorities need to figure out how to maintain oversight of the cryptocurrency industry and protect retail investors. Sometimes, regulatory action against crypto companies is sudden, as when China banned crypto mining in 2021. Crypto investors saw a decline in the network hash rate, which may have fed into price declines.

In the U.S., the Securities and Exchange Commission (SEC) has kicked off a legal battle against the world’s largest exchanges, Coinbase and Binance. How the lawsuits play out could have far-reaching implications for the crypto market. Exchanges could shy away from accepting American investors, which would decrease accessibility and adoption of crypto in the U.S. In general, regulatory uncertainties can create a sense of unease that leads to sell-offs.

Low-Risk Appetite

The U.S. Federal Reserve has continued to raise interest rates to tame inflation, thereby tightening financial conditions and putting pressure on stocks and high-risk assets such as cryptocurrencies. Since crypto prices have more closely aligned with those of stocks, digital assets often decline in price when investor sentiment shifts in traditional financial markets.

Leverage

Crypto investors commonly employ leverage, borrowing money to amplify returns (and losses). The Bitcoin leverage ratio measures the average amount of leverage used, and can indicate the amount of funding used to trade. Borrowed money eventually needs to be returned, and during market declines, traders may scramble to cover borrowed positions, triggering further selling in positions that still have value. The use of leverage can thus increase the magnitude of a crash.

Crypto Crashes: Historical Timeline

The crypto market has experienced stages of growth and downturns, followed by recoveries and declines. Volatility in the crypto space has also led to a number of major crashes. Following is a historical timeline of notable crypto market crashes.

• Bitcoin's First Major Crash (2011): As the first and most popular cryptocurrency, Bitcoin rose from $2 to $32 but crashed in June 2011 after the largest exchange in the world, Mt. Gox, announced it had been hacked, with millions of dollars worth of Bitcoin stolen and BTC’s price dropping to $1 in a single day. 

• The Great Bitcoin Crash of April 2013: After two years of a rapid price increase, BTC/USD plummeted from around $260 to $50 in April 2013, when Mt. Gox couldn’t handle trading volumes and shut down. 

• Mt. Gox Collapse of 2014: Mt. Gox declared insolvency in 2014 after losing over 800,000 BTC in a security breach. The subsequent crash led to a prolonged bear market, starting in December 2013, and over the next two years, Bitcoin prices declined from over $1,000 to below $200.

• Crypto Winter of 2018: In 2017, Bitcoin surged, but the bubble burst after its price dropped from a high of nearly $20,000 to below $12,000 following hacks and concerns about regulatory uncertainty.

• Pandemic Crash of March 2020: When traditional financial markets crashed as the Covid-19 pandemic unfolded, Bitcoin lost half of its value in two days.

• TerraUSD Crash of 2022: The TerraUSD algorithmic stablecoin — originally the world’s third-largest stablecoin — lost its 1:1 peg to the U.S. dollar, triggering widespread panic in broader crypto markets and wiping out $50 billion in crypto market valuation in a three-day collapse.

• FTX Crash of 2022: The collapse of the major crypto exchange FTX removed $183 billion in global crypto value, with Bitcoin dropping by 22% in seven days.

Why Is Bitcoin Crashing?

Bitcoin fell to a three-month low in June 2023 on the back of news that the Federal Reserve would potentially hike interest rates even further later this year. The Fed has been fighting record-high inflation by increasing interest rates, which tightens financial conditions through increasing the cost of borrowing. Investors then have to pay more to add leverage to trades, impacting profitability. The appetite for risk also declines as general liquidity and capital are less available for higher-risk trades.

The SEC’s lawsuits against Binance and Coinbase have led Binance to suspend Bitcoin withdrawals and U.S. dollar deposits, and have prompted trading platforms like Robinhood to remove certain coins. Uncertainty has lowered investor sentiment overall and undermined confidence. The crypto market is also still reeling from both the collapse of FTX and the entities it took down with it, and the Terra/LUNA collapse.

When fear surrounds the crypto market, Bitcoin (the largest and most popular token) acts as a bellwether, triggering price declines and selling pressure.

When Will the Crypto Crashes Be Over?

Predicting the exact end to crypto crashes is challenging because of crypto market dynamics and many other factors. The cryptocurrency market's volatility means that it can experience price fluctuations rapidly, so a crash's duration depends upon the underlying causes.

While some crypto market downturns can be relatively short-lived, others can persistently extend for longer periods. However, you can monitor the following factors:

• Market Sentiment: The Crypto Fear & Greed Index can help you watch for changes in overall market sentiment and investor confidence, such as increased buying activity and positive news that may indicate the end of a crypto crash.

• Regulatory Developments: Keep an eye on government monetary policies and regulatory actions related to crypto.

• Fundamental Developments: Track developments within the crypto ecosystem — including adoption by major institutions, technological innovation and new use cases — which can all trigger changes in investor demand.

• Technical Analysis: Analysts and traders commonly use technical analysis to identify reversal patterns and market trends. By examining price charts and indicators, one can assess whether a market is transitioning from a down- to an uptrend, or vice versa.

What to Do During the Crypto Crash

When the crypto market is crashing, an investor needs a clear, strategic plan of action. The following are some strategies to consider:

• Stay Calm and Avoid Panic Selling: Emotions can run high during a crash, leading to impulsive decisions. Avoid rash decisions that could lead to panic selling. Selling during a crash often locks in losses, so it becomes challenging to re-enter the market at the right time.

• Conduct Thorough Research: Use the time during the crash to conduct in-depth research on cryptocurrencies and blockchain projects. Test their fundamentals, technology and long-term potential. This information will be valuable when identifying investment opportunities as the market recovers.

• HODL: A buy-and-hold strategy calls for looking at assets that have the potential for long-term performance and retaining them — regardless of a trend’s short-term outlook. The HODL strategy (“hold on for dear life”) is popular for buying and holding crypto for the long term.

• Diversify Your Portfolio: Spreading your investments across various cryptocurrencies and asset classes can help mitigate risks during a crash. By diversifying, you reduce your exposure to any single asset and increase the likelihood of preserving your capital. 

How to Avoid Losses During the Crash

Be realistic about your crypto investments and the volatility you’re likely to face during market downturns. Only invest what you can afford to lose, and manage withdrawals of any borrowed money closely. Some strategies to help mitigate losses include diversifying your portfolio, setting stop-loss orders and avoiding emotional decision-making.

Is Now a Good Time to Buy Crypto?

Throughout major downturns, the crypto sector has remained resilient, and the market for cryptocurrencies is still developing and growing. Investing with a long-term view has served many crypto investors well. Crypto crashes have often presented attractive opportunities to buy. Given the recent recovery in the crypto market, investors may consider continuing to hold.

Before making any investment decisions, keep up with the most recent news and changes in the cryptocurrency market — and undertake careful research. The decision to buy crypto should ultimately be based on both your financial situation and your evaluation of market trends. 

The Bottom Line

Navigating a crypto crash requires a thoughtful approach and careful decision-making. It may be disheartening to experience a crypto crash, but crashes also present a unique opportunity for the well-informed and prepared investor.

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