Why Cryptocurrency Crashes Constantly

Source: The Visual Capitalist 

Crypto is still very much a young, small (and thus volatile) asset class/technology. This means that it doesn’t take much to cause large movements in price- even a little bit of FUD can cause a 40% movement to the downside. Likewise, news events like Tesla accepting Bitcoin can work miracles for the entire crypto market and deliver some sick gains. If you’re a crypto investor, you’ll quickly get used to the large corrections in price that happen frequently. The key is to keep your head clear and hold on for dear life. While cryptos are not stocks, in this article we’ll be using the classic stock-market definitions of a “correction” (10%+ fall to the downside) and a “recession” (20%+ fall to the downside). By these definitions, crypto has corrections and recessions constantly. 

Source: Money Morning

Crashes are almost always followed by upswings

Although by standard stock-market metrics cryptocurrencies frequently crash, crashes are almost always followed by surges to the upside. Take a look at the above chart of bitcoin’s price over a time period- the overall trend is always up and to the right, even if there are some super scary corrections in the meantime. Since you’re here and you’re reading this article right now, you’re probably very early to crypto (as in you’re an innovator)- and while you will realize much bigger returns than investors who come in later, it also means you will have to deal with a lot of the FUD and nerve-wracking drama that comes with crypto investing. Comparing the above chart of Bitcoin price crashes to the below chart of stock-market crashes, we can see that crashes in crypto occur far more frequently (at least for now) because the asset class is so small. Picture the $80 trillion+ market cap of the NYSE being a huge barge on the ocean that can withstand big waves without much trouble, while cryptocurrency with its $2 trillion market cap is a tugboat constantly capsizing and having to make itself right again. 

What to do when crypto is crashing

When crypto is experiencing a sharp drop, just chill- the rebound will come soon enough, even if it takes months. While comebacks from stock market corrections and recessions can take years, Bitcoin and other cryptos typically bounce back very quickly. You should continue your strategy of Dollar Cost Averaging– when the market is low, you’ll be able to get some crypto on the cheap! Like Warren Buffett likes to say- “whether it’s socks or stocks, I like to buy things on sale.” Don’t be like the majority of retail investors with weak hands and sell. All of the smart money HODLs and sticks it out/buys more when things are in the gutter. 

What is the probability that Bitcoin/crypto will go to zero?

In 2018, two Yale economists pegged the odds of Bitcoin going to zero at 0.4%, with a range between 0% and 1.3%. This was over three years ago- when all of crypto’s market capitalization was a fraction of what it is now, meaning that the odds of something going completely to zero are much lower than that. 2020-2021 have been the years of big institutions like Goldman Sachs and JP Morgan offering their customers cryptocurrency investment vehicles, and these institutions are both giving the digital asset class a lot of recognition AND if lawmaking bodies attempt to stifle the growth of the crypto asset class they’re likely to encounter resistance from their wealthy constituents who have invested in crypto. 

Over time crypto will become more stable

As the tugboat grows into a big yacht and then a commercial freighter, crypto’s price corrections will be far less volatile than they are now and in the first decade of Bitcoin’s existence. Even within the crypto space, large cap coins like BNB, Bitcoin, Ethereum, and Cardano have more price stability than smaller caps outside of the top 20. But there is a caveat- the returns will not be as great as they are now as the asset class grows. It will still be a good long while until the returns crypto can generate are the same or less than that of what a stock market index fund like the S&P 500 can generate. But don’t fret- there’s still a long way to go. Currently less than 2% of the world’s 8 billion people transact in or hold any type of crypto asset. Just imagine what the prices of coins will look like when that adoption percentage goes to 10% or 20%- in just a few years, you won’t have to imagine anymore. 

If you’re a crypto investor, get some thick skin

I’m telling you right now that it’s going to be a bumpy ride. For me, crypto investing is about the awesome returns, yes- but it’s also about supporting a technology that will bring financing to the world’s unbanked, and free us from the death grip centralized finance has had on the world for about 500 years. This is a technology that can deliver transactions at small fractions of the time and cost, and whose decentralized nature makes them far less vulnerable to attack than most banking entities. Why are we letting those who work in finance to reap such lavish rewards for nothing other than being middlemen? Embrace the crypto future- but be ready to face the doubters, be ready for the big price corrections, and be ready for the big pumps.

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