What causes a cryptocurrency crash?

In Insights

Profit. It’s the sole driving force behind most people’s introduction to cryptocurrency. Prices fly high and fast like a rocketship 🚀, but it seems like they can crash back down just as quick.

A cryptocurrency crash can be breathtaking for traders. If you’ve been in the market for long enough you’ll have experienced at least one yourself.

What goes up

Prices rise. As the green candles climb, investors become euphoric and traders feel like geniuses. The amount of green on the chart seems healthy but unsustainable at the same time. The market is balancing on the edge.

Then suddenly, a turning point is reached. Prices crash back down and put a halt to the prevailing trend.

It looks something like this:

Brutal. But what causes a cryptocurrency crash like this?

There are a few things.

Profit taking

After such a long price run up, corrections are bound to happen. Markets don’t just go straight up or down, there has to be movement in both directions.

In a strong uptrend you will see smaller corrections, but the clear prevailing trend is upwards. That’s how it works.

Traders and investors taking profit can be one of the causes of a correction. Once they have reached a target they will close their trades, creating selling pressure. If enough profit taking happens, it can have a knock-on effect.

The knock-on effect

When a trade is closed, selling pressure is put on the market. If there is enough profit taking at one point, the larger selling pressure could scare others to panic sell and cause a cascading sell off.

Of course, this doesn’t have to happen during a profit-taking event. There can be a cryptocurrency crash at the break of a support trendline.

Break of support

Support is a technical analysis term used for a level on a chart the ‘supports’ the price and stops it from falling.

This happened when Bitcoin broke the key support level of ~6,000 USD in 2018.

Notice how the price continually bounced off this yellow level. Once it broke, it broke with force.

Upon the break of this line holders sold and traders shorted. This caused immense selling pressure that bottomed the market.

Change of trend

Markets aren’t going to trend in one direction forever. An up-trend will always end at some point and be superseded by a downtrend.

When an uptrend ends and a downtrend begins, buyers are exhausted. There is no more buying pressure. This often ends with one last push up in price, before a large crash down.

The death of a project

Most crypto projects are start-ups. Naturally, not all start-ups survive. A cryptocurrency crash will happen if a project closes for good, or even if some bad news scares the market enough.

Similarly, if a project is identified as a scam, the market is likely going to crash. See Bitconnect for an example of this.

You may not know

A cryptocurrency crash isn’t bad news to everyone. In fact, lots of traders thrive in periods of panic.

A trader can profit off a crash by opening a well timed short position. 😉

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This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.