Why Did Crypto Crash?

Why Did Crypto Crash?

Bitcoin stack up and down arrows

The value of crypto markets reached trillions of dollars in about a decade after the launch of Bitcoin, which was crowned as the best performing asset of the decade in terms of annualized returns in 2021.

Still, it is hard to make sense of Bitcoin’s victory through our traditional narratives.  Bitcoin’s rise to the top hasn’t been “slow and steady” like the tortoise’s victory in Aesop’s famous fable, nor has it been “swift and capricious” as the hare. The history of crypto evokes a far more mythical animal.  Every few years, the cryptocurrency market crashes and burns, evaporating millions of dollars from the market, only to be reborn from its ashes and fly towards even higher peaks than before, just like the mythical phoenix.

In this guide, we will explore the reasons behind some of the biggest crashes in the history of Bitcoin and cryptocurrencies and try to shed light on how the crypto market has managed to recover every single time.

Why Does Cryptocurrency Drop in Value?

The price of cryptocurrencies swings up and down due to supply and demand dynamics. When demand for a cryptocurrency like Bitcoin rises, the prices also increase as there is only a limited supply of Bitcoin on the market. When demand falls for some reason or another, the prices also go down. In other words, the dynamic relation between supply and demand causes Bitcoin prices to swing from one end to the other, just like a pendulum.

There are many forces that affect this dynamic. The value of any cryptocurrency depends on the public’s perception of its usefulness and desirability as an asset. Positive news and content about crypto, developments that make it accessible to large masses, and backing from institutional actors, all renew people’s faith in the crypto economy, while delays, hacks, negative news, scams, and disruptive government regulations create distrust and cause a fall in the overall demand.

Sometimes, a sudden surge in demand can also cause an inevitable crash: When prices increase too swiftly, people become less incentivized to buy, and holders are tempted to sell-off in order to make huge profits. This is partly the reason why crypto price peaks are often followed by weeks or months of decreasing prices. But once the falling prices stabilize, the climb to the peak starts anew.

Why Did Bitcoin Crash in 2017?

The first major crypto market crash took place in December 2017, triggering Bitcoin’s fall from grace that would continue up until December 2018. But before we look into why the crypto market crashed so hard, let’s discuss why crypto bloomed during 2017, crowning Bitcoin with a new all-time high price.

You might be surprised to learn that the price of Bitcoin was less than 1,000 USD at the beginning of 2017. Bitcoin’s value rose steadily in the following months, surpassing the 2,500 USD mark in June 2017. Then, things took a dramatic turn: prices doubled within the next two months and then quadrupled again reaching almost 20,000 USD per BTC in December 2017.

The dramatic rise of cryptocurrency prices was attributed to several reasons: Bitcoin had expanded from “OGs” (a small group of early investors) to larger audiences; more cryptocurrency exchanges were established globally; and a slew of ICOs (initial coin offerings) has created a lot of excitement, drawing millions of dollars from investors in assets that promised to be the new Bitcoin, at least in terms of investment returns.

The ICO boom in particular is an oft-cited reason for the eventual collapse of the crypto market. Research shows that most tokens rolled out in ICOs (around 80%) during 2017 were little more than scams and Ponzi schemes. Though the scope of fraud hadn’t been clear by then, many expected the ICO bubble to burst towards the end of 2017.

Researchers also think Bitcoin price manipulation might have contributed to the infamous crash. Economists studying Tether-Bitcoin transactions identified a pattern that shows USDT/BTC transactions by a single trader on Bitfinex exchange propped up Bitcoin prices when the prices were dropping on other exchanges, creating an artificial price bubble that popped once the year ended.

Why Did Crypto Crash in 2018?

After reaching its all-time high on December 17, 2017, within 5 days, Bitcoin lost almost half of its value, falling to 11,000 USD. The fall would continue up until January 2019, with Bitcoin settling at around 3,500 USD.

These days, the crypto crash of 2018 is regarded as almost inevitable: As a growing and completely unregulated market, crypto is more than vulnerable to frauds and thieves, and evokes FOMO like no other, partially because the promised returns are impossibly high. The combination of these factors reached its peak in the ICO boom, creating an unsustainable bubble growth that could only pop, washing away millions of dollars of investment.

The falling crypto prices and lack of any development from many token projects, or outright disappearance of project managers, caused a sell-off panic that created a snowball effect on crypto prices. Add the alleged effects of Bitcoin price manipulation by large Tether holders to the equation, and you get the 2018 crypto crash.

Causes of the Biggest Dips in 2021

Bitcoin surpassed its all-time high not once but twice in 2021. In April 2021, Bitcoin prices reached  $64,000 per BTC. But the peak didn’t last long and Bitcoin lost more than half of its value in May 2021, falling as low as 30,000 USD.

Elon Musk’s announcement that Tesla would no longer accept Bitcoin payments due to Bitcoin’s environmental impact, the Chinese ban on cryptocurrency mining that evaporated half of the Bitcoin network’s hashing power, the US Department of Justice investigation of stablecoin Tether, and remarks by government officials that new crypto regulations are on the way are all thought to have contributed to Bitcoin crash.

But the asset recovered and began to rise again in September, and reached an all-time peak in November by surpassing 66,000 USD before prices began falling once again, sliding down for weeks.

There is ample cause for the latest price dips. Just as crypto mining recovered from the Chinese government’s earlier ban, another regulation from China’s central bank outlawed all cryptocurrency transactions (which had continued through foreign markets after the government’s previous regulations), crippling one of the largest crypto markets in the world and decreasing Bitcoin price.

Another blow to the Bitcoin market came with the announcement that the now-defunct Mt.Gox exchange would re-distribute 140,000 BTC among the former Mt. Gox customers who lost a staggering amount of Bitcoin to an infamous hack. These newly-released 140,000 BTC would not only increase Bitcoin’s supply drastically but could also drain the little liquidity in the market if investors decide to cash out.

Final Words

All the factors above are contributing to Bitcoin’s downward slide, but of course, as you might have realized by now, peaks and crashes are actually a normal part of Bitcoin’s growth. Price peaks are often, in time, followed by crashes that give way to new peaks, as the causes of these nerve-wracking drops work themselves out, and Bitcoin believers hold on for the next higher high or buy more at a bargain price. In other words, Bitcoin grows cyclically, and price drops can be an excellent time to delve into the crypto market. If you are interested in investing in Bitcoin but find yourself wondering and worrying about recent prices, you can reach out to one of our Coin IRA specialists to get the latest market news and learn how to take advantage of “buying the dips”.