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Bitcoin is the leader of digital cryptocurrencies. Even if you are not investing in Bitcoin, the rise and fall of Bitcoin will often affect the overall market trend. Looking back at the reasons for Bitcoin's three major crashes over the past few years, we may be able to better understand the factors that affect the cryptocurrency market.
Before analyzing the crash event, we must first define what "crash" is
The rise and fall of cryptocurrencies are usually significant, and it is not uncommon to see a sharp drop of 15% in a single day, as the price drops sharply in just one or two days and then immediately regains the lost ground. In this way, we do not define it as a crash. In other words, a real crash is when Bitcoin falls for a long time during a certain period, and market analysis and atmosphere believe that Bitcoin will be difficult to rise in the short term. This is why it is defined as "crash"
Bitcoin experienced a significant decline in early 2021, but the magnitude was not enough to make the market feel that it was a bear market. From mid-to-late December, the decline continued, and in early 2022, the decline hit the bottom again. On January 10, 2022, it fell to about USD$39,700, which is the lowest level in nearly half a year. Compared with the high of USD$68,000 in November last year, the magnitude has fallen by nearly 40%. Bitcoin rebounded slightly afterwards, but it is generally believed that if the price of Bitcoin continues to fall, the market is expected to fall into a new round of bear market.
Looking back at the bear market in the past, this time Bitcoin led the market to fall, and it was not due to a single reason. Market analysts believe that there are two key factors:
1. The Federal Reserve (FED) has stated that it will reduce the scale of bond purchases to deal with inflation, and has also leaked that it is expected to raise interest rates three times in 2022, which is seen as a sign of a reduction in the amount of currency in circulation. There is a capital linkage between the stock market and the cryptocurrency market, and it is not certain that more funds will enter the cryptocurrency market in the future. Therefore, at the end of last year, as soon as the Fed's announcement came out, the cryptocurrency market further declined.
2. Kazakhstan caused public protests in early 2022 due to changes in the liquefied petroleum gas pricing system. The local government cut off the Internet on the grounds of a state of emergency. Kazakhstan has long been an important international Bitcoin and cryptocurrency mining center because of its long-term provision of cheap energy. It is the second largest Bitcoin mining center after the United States, and its cryptocurrency computing power accounts for 18% of the world. The Internet outage caused the mining pool computing power to plummet.
In addition to the above two reasons, the GameFi sector’s earlier sharp rise and then decline, as well as the continued closure of mining farms in China, are also negative factors that have led to the continued downward trend of the entire cryptocurrency market.
The first Bitcoin crash: 2013
If we are to count the first crash of Bitcoin since its launch in 2009, we have to talk about 2013.
In November 2013, Bitcoin once soared - the "surge" here refers to a literal surge. In November of that year, Bitcoin once soared from $200 per unit to a historical high of $1,129 in just one month. The reason behind this was that European countries began to recognize Bitcoin as a legal currency, and investors from Greater China began to pour in, and Bitcoin suddenly became a hot investment topic at the time.
However, a sharp rise is often followed by a sharp fall. Bitcoin began to experience its first major virtual currency crash in December, and fell to a low of only $178 per BTC in January 2015. This became the largest crash record since the launch of Bitcoin.
The first Bitcoin crash: panic selling after the bull run
The virtual currency world emphasizes decentralization, so the volatility has always been significant, and the reasons for rapid rise and fall are difficult to explain in a few words. If you want to take into account the situation before and after 2013, one of the potential reasons may be that the country issued the "Notice on Preventing Bitcoin Risks" at that time, which caused rumors to spread in the market and triggered panic selling.
This leads to another problem, that is, investors in virtual currencies, whether they are large or retail investors, may still view Bitcoin, the leading currency, with a "speculative" mentality. After the bull market surges, they will sell off and reap profits at the slightest sign of trouble, causing a panic mood.
Although as cryptocurrencies develop and funds become more diversified, the impact of this speculative mentality will supposedly become less and less, but it is often one of the elements that triggers a crash.
Second Bitcoin Crash: 2017
The second Bitcoin crash in 2017 was the longest crash to date. At that time, Bitcoin fell from $19,900 at the end of 2017 to $6,955 in February 2018, and the price of the currency fell by more than half.
Although there were signs of a rebound afterwards, it has never returned to its original highs, and has even fallen again and again until early 2019, when it reached its lowest level in recent years at about US$3,800. It was not until mid-to-late 2019 that it began to slowly pick up.
The second Bitcoin crash: Various unfavorable market news appeared at the same time
Until now, the Bitcoin crash in 2017 is still a topic in the cryptocurrency circle, and the potential reasons behind it are almost always compared with the subsequent crash. Including countries beginning to regulate cryptocurrencies, popular derivatives such as futures beginning to collapse, plus the panic surge after the sharp rise, various reasons appear at the same time, and without any good news stimulation, the sell-off will continue.
This is one of the biggest differences between the cryptocurrency market and the traditional market. After a period of correction, the traditional stock market or economic market will always rebound as economic activities continue. However, if a real "bear market atmosphere" appears in the cryptocurrency market without new technology or positive news, confidence will be difficult to restore, and the market may not recover in a short time.
The third Bitcoin crash: early 2021
Bitcoin surged in late 2019 and returned to a high in 2021. This time the rise was more dramatic than in the past, from about $10,000 to $40,000, and then to a recent high of $63,000 in April 2021, and then fell back to $29,807 in July, with the price of the currency evaporating by more than half.
The third Bitcoin crash: The confidence crisis in the new cryptocurrency ecosystem
Although some people pointed out that after this sharp drop, Bitcoin quickly recovered its lost ground, so it cannot be regarded as a "crash."
However, the situation in 2021 is slightly different from the previous times. First of all, large public chain coins including AVAX, SOL, LUNA have been launched. At the same time, NFT and GameFi have also emerged rapidly, and various liquidity mining/staking functions have become more and more perfect. The ecology of the cryptocurrency world is no longer comparable to that of 2017 or 2012, and the leader of Bitcoin token cryptocurrency often reflects the atmosphere of the entire market.
The sharp drop in mid-2021 was seen by many as the first crisis of confidence in this environment, so it was once regarded as another crash.
However, after this major correction, there has still been no significant cryptocurrency bear market. In addition, as concepts such as the Metaverse, GameFi, and NFT are increasingly accepted by the public, the Bitcoin and cryptocurrency markets still have the opportunity to continue to rise.
Bitcoin/cryptocurrency prices are highly sensitive, and there are many reasons for the crash
Regardless of which decentralized technology you believe in, it cannot be denied that the cryptocurrency world does not have regular data from the real economy/national financial institutions as an indicator of the direction of the market. Therefore, in the cryptocurrency world, any news can be bullish/bearish news, making the value of all currencies extremely sensitive.
As a result, the price of cryptocurrencies is extremely sensitive, and both an increase and a correction will occur in a short period of time. Therefore, if at least three "crashes" described in this article are to occur, they are often not caused by a single negative factor, but by the simultaneous occurrence of various negative factors, causing capital concerns in the entire market.