Why does the crypto market crash? Crypto has been a shiny new toy for a lot of people. Even if you’re not into trading the stock market, it seems like crypto is the trendy thing to be investing in. In fact, I’ve seen people on Facebook getting involved in Bitcoin even though they have no clue what it means to trade. As a result, there will be poor trades placed. Make sure you know what defines a crash so you know if you’re seeing a crash, pullback, or correction.
If you have ever dipped your toe into trading cryptocurrencies, you’ll know firsthand that it is a volatile market. Trading cryptos is not for the faint of heart and there have been several cases where tokens have gone to zero overnight.
It is an environment that is completely different from trading in stocks or other securities. You might be wondering why people even bother investing in cryptos if there is so much risk.
Well, crypto investing has also made countless fortunes for investors who are able to get in at the right time.
So why do crypto markets crash? There are multiple reasons why these markets are more prone to crashing than the stock market.
The world of crypto trading is a wild one and if you are naturally a risk-averse investor, then my suggestion would be to either steer clear or only allocate a very small percentage of your portfolio to it.
Here are some of the reasons why the crypto markets crash at a higher rate than the stock markets!
The Whales are in Charge
A whale is a major investor that holds a large amount of a crypto or multiple cryptos in their wallet. Generally, a crypto whale has assets in excess of $10 million. Despite cryptocurrencies being built on a system of decentralization and democratization, crypto whales actually own a majority of the world’s supply. When so much of the supply is tied between a few major wallets, then they can control a lot of the price action.
Stock whales exist too but there are regulations in place to keep investors from owning such a large part of a company. If you own over 10% of the outstanding shares, then you could be considered a part-owner in the company. This has some specific tax implications as well as being able to provide your say in the direction of the company. Major investors like Warren Buffett consciously stay below the 10% ownership threshold.
Crypto whales can have an even larger impact on deflationary coins like Bitcoin. Since there will always be a limited supply of Bitcoin in the world, the portion they own will only increase in value. If a whale decides to dump 25,000 Bitcoin at once, it can have a massive impact on Bitcoin’s price. Since the crypto owners regulate the markets., this can, unfortunately, happen at any time. This leads us to the next reason why crypto markets are prone to crashing.
Crypto Is Not Regulated
This is one of the most important things to know before getting involved in cryptocurrencies.
The stock market in the US has the SEC or the Securities and Exchange Commission. This is an official regulatory body that represents the United States government and manages the stock market.
There is no such body right now for cryptocurrencies, so it really is the wild wild west. There has been talk about the SEC starting to monitor the crypto markets, especially when it comes to the value and issuance of stablecoins. While it is likely that eventually, the SEC will have some influence, nothing has been set in stone as of yet.
When you invest in a stock, you are taking a very small ownership of the company. This company is also regulated in how it behaves as a publicly traded company.
Not so much with cryptos! Unfortunately for those who get involved with a scam crypto, there is no way to get your money back. There is no ability to file a class-action suit like you can against a company. Crypto wallets are anonymous and so are most of its developers.
Crypto Markets Trade 24/7
While the US stock market is open from 9:30 AM to 1:00 PM EST, the crypto markets trade around the clock. What’s more, the crypto markets exhibit different behavior depending on which time zone you are in. When US crypto investors go to sleep, the Asian crypto investors wake up. Since the markets are open around the clock and even on holidays, you could theoretically lose while you are asleep
This is obviously one of the biggest reasons why a lot of investors do not like trading cryptos. But it’s also a reason why some do enjoy it! It is interesting to think about a market where you can jump in at any point in the day and begin trading. Why do the crypto markets trade around the clock? It is meant to be a decentralized and global market that is open at all times of the day for everyone around the world!
There is More FUD in Cryptos
Why does the crypto market crash? FUD or Fear, Uncertainty, and Doubt is a term that is used a lot amongst crypt investors.
What it is referring to is the fact that a lot of crypto trading is momentum trading. With stocks, you can follow along with quarterly earnings reports and company catalysts.
Revenue numbers are also a good indication of the company’s growth rate. Most companies also provide a tangible product or service to their customers. All of these things make it easy to track the progress of a publicly traded company.
With cryptos, things are a little different. There are no company fundamentals or balance sheets to read over. A lot of these crypto projects are in the early stages and it is difficult to imagine what they will be like ten years from now.
This is why a lot of cryptos trade on momentum and word of mouth. Some traders do use technical analysis to trade cryptos, while others use things like social media sentiment. Either way, there are much easier ways to track a stock’s value compared to a crypto’s value.
The Biggest Crypto Market Crashes
In recent years we have seen several crypto market crashes. A lot of these revolve around the volatility of the price of Bitcoin, the largest crypto by market cap. Even now, as Bitcoin sinks off of its all-time high prices, a lot of FUD is creeping into the crypto narrative. But as you will see, every time the crypto markets crash, they always bounce back stronger than before.
Yes, we are going way back to the early days of Bitcoin. The token was finally starting to gain some traction and had jumped from a value of $2 to $32 in a matter of months. It was finally looking like the world was ready to recognize cryptocurrencies. Then, in June of 2021, the largest crypto exchange called Mt. Gox was hacked by criminals and millions of dollars in cryptos were stolen. Immediately following the hack, Bitcoin fell from over $32 all the way down to $0.01.
Bitcoin rebounded from the earlier Mt. Gox hack and was now trading at a robust level of nearly $260 per coin. The crypto hype was hitting the mainstream and investors from all walks of life were looking to trade on Mt. Gox. Well, given how network infrastructure was back in 2013, Mt. Gox crashed after being overloaded by new traders. During its downtime it was hacked as criminals took advantage of it being vulnerable. Despite all of the progress that had been made, Bitcoin tumbled back down to $50.
This is one Bitcoin crash that traders now remember clearly. Bitcoin had surged to an all-time high of $20,000! Compare that to just six years earlier when it was traded for $0.01. Well, as rumors circulated that several major Bitcoin markets including South Korea and Japan would be banning the crypto, the price began to fall. In the span of the year, Bitcoin lost 84% of its value once again and was trading for $12,000.
This will forever be known as possibly the most volatile month in the history of the US markets. It was the first real month of the COVID-19 pandemic hitting the US and global markets. In a matter of weeks every stock market in the world crashed, and we found ourselves in a flash bear market. Well, Bitcoin was not spared from this either. It is incredible to think that as recently as March of 2020, Bitcoin was trading for a price of $4,000.
So you can see just how many setbacks Bitcoin has had on its own over the past few years. Generally speaking, how Bitcoin goes is how the broader crypto markets go. It is the benchmark and barometer for how cryptos are performing across the board. Because of its unique system, crypto markets are much more prone to crashing than the stock market is. First, a number of whales own a majority of the cryptocurrency in the world.
Next, the crypto markets are not regulated by any governing body. Third, crypto trades around the clock 365 days per year, so there is just that much more potential for a market crash. Finally, crypto traders trade on momentum and FUD, not on any tangible product or service. If you do get involved in trading cryptos, be aware of the risks and that the markets can crash at any time! Happy trading!