There is one simple reason why crypto prices are falling. And once you understand it, crypto investing – or any investing, for that matter – gets a whole lot easier.[Please note this post has two affiliate links. If you want to know what that means, or find out why I use affiliate links, you can take a look at my disclaimer page.]
Why are crypto prices falling?
To put it simply, it’s the same reason crypto prices fall every time. That might sound flippant, or even evasive, but it’s true.
However, don’t be put off.
In this article, I will cover:
- The real reason crypto prices are falling.
- The four specific reasons crypto prices can fall.
- The three golden rules of crypto investing.
- A simple crypto investment strategy that will help you to stop worrying and love the crypto crash.
Here’s the reason crypto prices are falling
It all comes down to two things: fear and greed.
It’s the same in the stockmarket, only it plays out a lot slower there.
It used to be said that a month in the crypto market is like a year in the stockmarket. Although, people stopped saying that when the crypto winter really set in.
Still, crypto markets are like traditional markets on about 10 cans of red bull.
Things happen fast. The highs are euphoric, and almost always followed by an anxiety-ridden crash and later self-loathing.
As I said, it’s the same way in traditional markets. Only they move much slower. So let’s take a look at how they work first.
Using the US as an example, it’s had around 12 major crashes since 1900.
the most notable of these are:
- The Wall Street Crash of 1929 – which led to the decade-long Great Depression.
- Black Monday – the greatest one-day percentage decline in US stock market history (around 20%), which led to a three-year bear market.
- The dot-com bubble – the one everyone loves to equate crypto with – which lasted around four years.
- And of course, the 2007 global financial crisis – “the reason millennials can’t afford to buy houses and why no one is earning decent money anymore” – which led to the creation of Bitcoin.
(As a side note, whatever entity names financial crises has done a really stellar job over the years. I mean people talk a lot about “branding” today. But I doubt anyone is going to top “the Great Depression.”)
It all comes down to fear and greed (as cynical as that sounds)
What do all these crashes have in common? Fear and greed.
People get greedy.
Then something happens that makes them fearful.
Then enough time passes to make them forget they were ever fearful.
Then they get greedy again.
What we can learn from the history of stockmarket crashes
Before the 1929 Wall Street Crash, stock investing had become so popular that even beggars were giving out stock tips.
Here’s what Bernard Baruch, a famous investor from the time, had to say about it:
“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”
Kind of sounds like crypto in 2017, doesn’t it?
And of course, many people still remember the famous dot-com crash.
At the time, companies with no product, no customers and no plan for making any money were bid up to huge valuations.
Then it all came crashing down. And no one wanted to touch an internet company for the better part of a decade.
Kind of sounds like crypto again, doesn’t it?
However, it pays to remember that not all those dot-com companies were duds.
While everyone ridiculed those foolish enough to get caught up in the dot-com crash, they weren’t laughing for long.
Many of today’s most powerful companies and greatest investment opportunities came about shortly after that crash.
Just ask Amazon and Google.
The crypto industry has likely already birthed its own Amazon and Google. The difficulty comes in recognising them.
How the fear and greed cycle works
Now, the interesting thing about this cycle – we can call it the fear and greed cycle – is that the fear part doesn’t have to be based on anything real.
You know that feeling you get when things are going a little too well in your life, and you start to think something might go wrong?
Well, imagine that feeling times by about 180 million – the rough number of people invested in the US stockmarket – and you start to understand how the stockmarket feels during a bull market.
As the saying goes, “bull markets climb a wall of worry.”
And come to think of it, we should probably just establish what bull and bear markets are.
What is a bull market and what is a bear market?
If you’re not familiar with the term “bull market”, it basically just means a rising market. And a “bear market” means a falling market.
Why do they have these names?
For an absolutely pointless reason: it’s how the different animals attack.
Bears tend to swipe downwards with their claws and bulls tend to gore upwards with their horns.
Seriously, that’s the reason most economists and their ilk will give.
It might not be the correct reason, however.
A far more likely one is that “back in the day” bearskin middlemen would sell bearskins to people before the hunters had gone a huntin’.
These middlemen would then hope that the price of bearskins fell in the meantime. That way they would make a bigger profit.
So a “bear” would be someone who wants the market to fall. And a “bear market” is a market that favours the bears.
And because back then, animal cruelty was all the rage. Bull vs bear fights were everywhere, and people considered a bear’s natural enemy to be a bull.
So if a bear wants the market to go down, a bull must want the market to go up. Because, you know, they’re natural enemies.
Bearskin trading is also where futures contracts originated. But that’s
a topic for another day.
Why people buy and sell crypto
Think about it. People buy crypto, or stocks, or any investments with the intention of selling them on for more money than they paid for them at a later date.
This is the greed part.
If they begin to think these investments are likely to lose value, they will want to sell them to avoid losing money.
This is the fear part.
Why crypto prices fall so fast
Different people have different risk tolerances.
For example let’s say, Bitcoin loses 2% in 24 hours.
- Investors with a high risk-tolerance will hang onto their Bitcoin because they still believe it will go up in the long run.
- Investors with a medium risk-tolerance will do likewise.
- So will investors with a low risk-tolerance.
- But investors with a zero risk-tolerance will be forced to sell because they put in more money than they could safely afford to lose.
This selling then triggers a chain reaction.
Now because of the selling pressure from those zero risk-tolerance investors, Bitcoin is down 5% in 24 hours.
- Investors with a high risk-tolerance will still hang onto their Bitcoin.
- Investors with a medium risk-tolerance will still hang on to their Bitcoin.
- Investors with a low risk-tolerance will now sell because they fear Bitcoin will keep falling and they don’t want to lose any more money.
This new selling pressure sends Bitcoin even lower. Now it’s 10% down in 24 hours.
Now even the medium risk-tolerance investors sell, and it drops another 5%… you get the picture.
Now obviously, there aren’t only four categories of investor.
The amount of risk tolerance investors have is on a continuous spectrum. As are crypto’s price moves.
But it’s easy to see how something that starts out as a small drop can snowball into a crypto crash.
At this point, you might be thinking why doesn’t the same thing happen in the stockmarket? Why are its swings so much less violent?
How Black Monday forever changed the face of finance
Remember that amazing trivia you read about the US’s major stockmarket crashes a few minutes ago?
You, know. The one you didn’t just gloss over in order to skip straight to this section.
Yeah, that one.
Well, one of those crashes was not like the rest.
Black Monday was different.
On Monday the 19th of October 1987 the world’s stockmarket’s suffered a crypto-like crash.
The Dow Jones Industrial Average (DOW) fell 22.6%. And although this might seem trivial to crypto investors, it remains the largest one-day crash in history.
Black Monday left stockmarkets around the globe reeling.
By the end of October, every single one of the world’s major markets was down.
And not just a little bit. More than half ended that month between 20% and 40% in the red.
That would be a catastrophic two weeks in crypto. But in regulated financial markets, which had generations of people’s savings and pensions invested in them, it was unthinkable.
Worldwide losses were estimated at $1.7 trillion ($3.5 trillion in 2019).
So in less than two weeks, the world’s stockmarkets lost around 18 times what the entire crypto market is worth today.
Something had to be done.
Black Monday’s legacy
Like most stockmarket crashes, Black Monday came immediately after a period of unbridled market euphoria.
In the UK, for instance, the FTSE 100 had risen 49% in the 12 months prior to Black Monday.
A lot of this optimism and confidence was due to new technology. In 1986, stockmarkets began running on computers.
This switchover was known as “the big bang”. (Again, great branding by the world of finance.)
And like most technological revolutions, it filled people with new hopes and dreams… and greed.
But computer trading meant things could get out of hand very fast. And that’s exactly what happened on Black Monday.
As The Telegraph writes:
The exact cause of the crash is not known, but the most commonly cited theory is that excessive valuations and some negative events led to selling, which was exacerbated by newly introduced computer trading.
As certain thresholds were crossed, the computers automatically began to start selling certain stocks, driving prices lower still.
Darius McDermott, of fund shop Chelsea Financial Services, said: “One theory is that initial falls due to the slowing US economy, Iran attacks on US ships and falling oil price were intensified by computer trading, which coupled with overvalued markets, led to a panic.
The reason we have never seen a day like it since is because stockmarkets now employ “circuit breakers”, or “Trading curbs”, if you want to use the correct term.
If the market starts to fall too fast, all trading is automatically halted.
And that’s why you don’t get such violent moves, up or down, in the major stockmarkets these days.
Whenever they get close, they are shut down and given some time to cool off.
Why the crypto market falls (and rises) faster than the stockmarket
Crypto, by its very nature, is decentralised.
You can’t just shut down crypto trading. That’s impossible.
Even if one exchange was to halt trading – as often happens – many more will continue.
And even if many of the major exchanges were to shut down trading at the same time, decentralised exchanges (DEXs) would continue to trade.
This is one of the most exciting, and in some ways, scary, things about crypto markets. No one is really in control. And no one really knows what’s going to happen next.
So when a big event does occur. Like say Bitcoin hitting $18,000 on the 8th of December 2017, the market goes crazy.
In the space of 24 hours, Bitcoin went from $14,000 to $18,000 and then back down to $14,000.
Nine days later it went on to hit almost $20,000.
Then two months after that it was back down at $6,000.
Something like that could – at least in theory – never happen in the major stockmarkets because of Black Monday’s legacy.
This is why crypto prices are so interesting to follow… so long as you follow the golden rule and never invest more money than you’re happy to lose.
And if you’re thinking days like that will never happen in crypto again, you’d be wrong.
In October 2019, for instance, Bitcoin jumped 43% in less than 24 hours. I covered the story at the time here.
Okay, but why do crypto prices fall in the first place?
If you’ve been paying attention, you’ll probably notice I haven’t actually given you any clear reasons as to why prices fall in the first place.
It’s easy to see why crypto prices move so violently once they start moving, and the wider events that cause those moves. But what about specifics?
Well, there are four specific reasons why crypto will start to move in the first place. And once it starts moving, all four tend to play off and exacerbate each other.
The four reasons are.
1. Traders and manipulation
I was going to separate these into two categories, but really, they are one and the same.
Traders make a living by predicting short-term moves in the market and acting to profit from them.
For example, they may identify a pattern in a crypto price chart that tells them it’s either overbought or oversold. They will then either buy it or short it in order to profit.
Or they may identify that a certain crypto has a strong upward or downward trajectory and move to profit from this before the pattern breaks.
Most traders lose money. But some make an awful lot.
Some traders are also willing to bend the rules to make sure that they aren’t the ones losing.
They can, and do, do this in many different ways. One of the most common in crypto is the pump and dump scam.
The classic pump and dump scam
A trader will buy up a big quantity of a less well-known crypto (or if they have a lot of spare capital, maybe even a big one).
They will then spread the word through various channels – usually Telegram groups – that said crypto is due to rocket.
They may even set up a series of specific “pump” groups which will all buy into this crypto at the same time on the same day.
The group members will not know that the person puppeteering the group has already bought up most of said crypto and will sell as they buy.
The groups give the signal and thousands of people all buy that crypto at the same time, shooting up the price.
Eventually, people start to lose their nerve and decide to sell. And by eventually, I mean within minutes to hours.
Some of these people will make off with fantastic gains. Most will lose all their money. And the puppet master will have made hundreds of thousands or even millions of dollars.
You may ask why anyone would take part in these groups when they are so obviously being fleeced.
Well, no one ever thinks they’re going to be the one left holding the bag… until they are.
Or to quote the famous philosopher Mike Tyson: “Everyone’s got a plan until they get punched in the mouth.”
And here’s a sobering thought.
What if the entire crypto market is just one big pump and dump, and we’re all the suckers?
2. News events, rumours and FUD
Another major mover of crypto prices is the news.
In a bull market (greed), bad news has little effect on prices, and good news sends them rocketing.
In a bear market (fear), it’s exactly the opposite.
But as I said earlier the fear and greed – or bull and bear – cycle is just that, a cycle.
At some point bad news will affect a bull market and good news will affect a bear market.
And of course, the magnitude of news is key here, too.
If a major country said it was switching its reserve currency to Bitcoin, clearly Bitcoin prices would explode upwards.
By the same token, if a major country said it was Banning Bitcoin, prices would collapse.
We saw this happen first-hand during the crypto bull run of 2017, as I wrote about in this article about China’s effect on crypto prices.
But here’s the thing about the news, it doesn’t even need to be true to move prices.
FUD – the hidden force behind many crypto moves
FUD stands for Fear, Uncertainty, Doubt.
It is a manipulative tactic mainly used by marketers.
The term became popular in the 1970s, when IBM used FUD to dissuade people from choosing a rival’s product.
But FUD really came into its own when crypto got going.
There is FUD published by pretty much every crypto news site every single day – whether they are aware of it or not.
Off the top of my head, there was recently FUD published by The Block about a raid on Binance’s Shanghai office in November 2019.
It turns out Binance hasn’t even had a Shanghai office since 2017.
That’s just one example, but it happens every single day.
This is why crypto sites have such a bad reputation. No one trusts them.
And to be fair, many of them are owned by rival investors. So they will only publish good stories about certain cryptos and bad ones about others.
You can think about it like the political leanings of the mainstream media, but even more underhand.
I guess at this point, I should probably say that coin confidential is completely independent.
I have no investors or hidden moneymen. I simply cover what I think is interesting, important or useful.
And I do my best to get to the bottom of every topic I write about – which can prove very difficult in the world of crypto.
But I would still strongly suggest you always look at more than one source when it comes to crypto.
And always, always, always do your own research (DYOR) before you invest in anything.
3. Good old-fashioned profit taking
It makes sense to take profits.
If you don’t, as I said earlier, there was no point investing in the first place.
The thing is, when people take profits it moves prices downwards.
Profit takers are adding supply to the market. So by basic (and vastly oversimplified) supply and demand principles, this will reduce prices.
And if we’re teetering on the edge between greed and fear, a round of profit taking may just start that snowball effect I wrote about.
The deeper into the greed cycle we are, the more likely a small price move will end up making big moves in the market.
Remember, at that point, people are just looking for that first signal before they decide to sell as well. Like I said, no one wants to be left holding the bag.
4. Technical issues
You may have noticed that most of these reasons have been based on psychology and emotions.
But sometimes, especially in crypto, it’s the system not the people that fail.
There could be an exchange hack.
There could be a bug or a flaw in a crypto project’s code.
There could be a new technology that supersedes what other cryptos are based on.
Or there could be any manner of unforeseen technical issues.
Quantum computing could even break encryption altogether.
(But then crypto prices falling would be the least of our worries. You’d be more worried about your bank account… and the entire financial system collapsing.)
Unfortunately technical issues are extremely common. That’s the nature of dealing with a new technology.
And right on cue, as I am typing this, a news alert has just popped up on my phone saying yet another crypto exchange (Upbit) has been hacked.
The hackers apparently made off with $49 million of Ethereum.
If the hackers decide to dump the haul onto the market, it will send Ethereum’s price falling.
5. A combination of the above
Each of these events rarely happens in isolation.
An exchange hack leads to a news story, which leads to FUD about how big the hack was and who will be affected, which leads to traders short selling, which leads to people taking profits or cutting losses… you get the idea.
Much of the time it is almost impossible to work out what specific event triggered the sell off. But once it starts, boy, do the rumours start flying.
Our brains crave a narrative. And whoever can create a convincing one in a time of crisis will gain a lot of publicity and potentially make a lot of money.
That’s why when crypto prices are falling (or rising, for that matter) you’ll see many theories flying around.
And these theories are usually stated with absolute certainty.
My advice is to be very sceptical of anyone peddling a very specific theory as to why crypto prices are rising or falling. (Unless it’s something that’s clearly obvious to everyone.)
They may even be partially right, but it’s very rarely just one reason. And the more certain they are, the more likely they are pushing something that suits their own agenda.
In crypto, and in life, it pays to do your own research and think for yourself.
How you can use this to your advantage – the three golden rules of crypto investing
Given that we know crypto prices will fall at some point. It makes sense to prepare for it happening in advance.
An easy way to do this is by following the three golden rules of crypto investing.
In the next few months, I will write a full feature on these rules. What follows is just the Cliffs notes from that feature. But sometimes the Cliffs notes are all you need.
1. Never invest more than you are happy to lose
This is the single most important rule when it comes to crypto investing.
It doesn’t matter what you invest in, or how you invest in it, so long as you follow this rule.
The reasons for this are twofold:
1. It will keep you sane.
If you’re only ever putting money into crypto that you don’t need. Money that you are perfectly willing to see go to zero, then you won’t be so stressed about the frequent ups and down of the market.
You’ll be free to live your life, without the constant need to check crypto prices, and the constant fear that you are losing money you actually need.
2. Strangely, it could mean you and up making more money.
Here’s the thing. Crypto is extremely volatile. That’s why it’s so fun to invest in. So a very small stake could make a significant difference to your life.
In the last crypto bull run, many people had the chance to make 10 times their money or more, simply by investing in the biggest cryptos.
They also would have frequently seen their crypto investment drop by 50% or more in a matter of days.
But the chances are, they wouldn’t have seen that 10x gain if they hadn’t stayed in after that 50% loss.
Over the course of 2017, Ethereum dropped by 50% three times. It may have even happened more than three times. But I certainly remember those three.
However, by January 2018 it was way up.
If you’re only investing money you don’t care about, then you don’t mind seeing that money lose 50%, or even 90% of its value. So you can stay invested.
However, if you actually rely on that money, when it drops you will be forced to cash out… and then you’ll likely miss the 10x gain.
If a stock falls by 50% or more in a matter of days, it’s probably never going to recover. Or at the very least, it may take years, or even decades to do so.
In crypto, we see 50% drops followed by 200%+ gains all the time.
Or to put it another way, your maximum loss is capped by the amount you put in (unless you’re using leverage. Never use leverage in crypto, you maniac.)
But your maximum gains are unlimited.
Say you put $150 into Ethereum. You can only ever lose $150. But you could potentially make thousands. $26,250 in the case of 2017.
But for the chance to make that $26,250, you have to be happy to watch your $150 go to zero.
I would be happy to watch a $150 investment go to zero. I wouldn’t be happy to watch a $10,000 investment go to zero.
Only you know how much money you’d be happy to lose in crypto. And you have to be happy about it, otherwise what’s the point of investing at all?
2. Dollar-cost average in and banish your emotions
Dollar-cost averaging (DCA) means investing a set amount at set intervals, no matter what the price of the asset is.
For example, you may decide to invest $50 into crypto on the third Thursday of every month.
You will do this whether crypto prices are up or down at the time.
By doing this, you’re not trying to time the market, and you’re taking your emotions out of the equation.
Every famous investor will tell you that you need to take your emotions out of investing if you want to succeed.
Over the long run DCAing means you end up buying more crypto when its cheap. So you bring down your entry price. Which means you make more profit when you sell.
If you weren’t DCAing you probably wouldn’t have ended up buying when prices were really low because your emotions would have taken over.
And you would have probably ended up buying more when prices were high because of the general market euphoria.
This strategy also allows you to ensure you’re not investing money you can’t afford to lose, as it will stop you just putting in a big lump sum when it looks like prices are about to rocket.
The importance of taking profits
You can use a similar, logical strategy when you cash out.
If you don’t take profits from time to time, you could end up with nothing to show for your efforts.
This realisation hit people hard during the crypto winter.
It was near-impossible not to make money in crypto over 2017.
True, there were many days of 50% drops or more.
But if you’d been invested at the beginning of the year, you’d likely be up more than 1,000% by January 2018.
However, if you didn’t take any profits along the way, there’s every chance you’re right back where you started today.
Taking profits when the market is in its greed phase ensures you will still be in profit when fear sets in.
Of course, that’s easier said than done.
An easy way to overcome this issue is to simply set price targets and stick to them.
You could take out a certain percentage of your investment every time it goes up by 50% or more.
Or, you may want to do what a lot of investors do and take out your initial investment if it doubles.
That way you’re “playing with the house’s money”. All your gains from there on out are effectively free.
(So long as you don’t then get carried away and dump all that profit back in.)
It’s true that back in 2017, it was pretty hard to actually cash out. But today, we have many options, which will let you cash out in minutes.
I’ll be writing another feature on the cheapest and fastest way to cash out your crypto in the coming months.
3. Don’t leave your crypto on an exchange: not your keys not your crypto
“Not your keys, not your coins.”
If you follow any crypto communities, you’ll have heard that phrase more than a few times.
What it means is that if you store your crypto on an exchange – any exchange – you don’t really own your crypto at all, the exchange does.
If the exchange gets hacked, you’re the one that loses out.
And as you’re no-doubt aware, exchange hacks happen ALL THE TIME in crypto.
There was literally one as I was writing this feature.
In 2019 alone, there have been seven major exchange hacks.
Even Binance, the biggest crypto exchange in the world was hacked in May 2019. (Although it should be said that Binance ensured none of its users actually lost money because of the hack).
A lot of the time, when an exchange is hacked, it is forced to shut down, and its users may never get any compensation. If the money isn’t there, the money isn’t there.
However, there is an easy way to make sure you won’t lose any money if an exchange is hacked. Don’t store your crypto on an exchange.
You should only ever move your money onto an exchange when you’re about to trade it.
Once you’re done with your trade you should move it straight back onto your own hardware wallet.
What is a hardware wallet and why should you use one?
Hardware wallets are basically tiny encrypted computers designed for one purpose: storing crypto securely.
They are usually around the size of a USB-stick, and you need to plug them into a computer or connect them to a mobile phone to use them.
The private keys to your crypto are stored, encrypted, inside the hardware wallet, and they are never revealed when you use them.
This means you can connect them to your computer or phone without worrying that hackers or malicious software will steal your crypto.
They also employ pin numbers, with increasing lockout times for wrong answers. So even if they do fall into the wrong hands, your crypto should remain safe.
Which means, in theory at least, hardware wallets are unhackable.
What if you lose your hardware wallet, will you lose all your crypto too?
When you set up a hardware wallet, you have to write down a passphrase in order to make it work.
This passphrase is usually around 20 random words, and it can be used to recover your wallet if you ever lose or break it.
All you need to do is buy a new hardware wallet and re-enter this passphrase into the new wallet. Then your cryptos will magically appear.
So it goes without saying, you need to keep that passphrase safe and secure. Otherwise you might fall victim to the “sock drawer” attack.
Which hardware wallet should you use?
There are two main hardware wallet makers on the market.
They are Trezor and Ledger.
Both their products are great. And I have used both of them.
Which one you decide to use, depends on which one supports your crypto.
You can see which cryptos each one supports here:
[please note these two links are affiliate links. What that means is if you click one and buy a product off that site, I will get a commission for the sale.
It doesn’t make the price any more expensive for you. It simply helps me to support this site and continue writing free articles like this one. At least, that’s the idea.]
And if you’re going to buy one, I would suggest buying through their official sites, using the above links.
But then I guess I would say that, wouldn’t I? Seeing as I get a commission if you do.
But in all honesty, a hardware wallet is one of the few things you probably don’t want to buy through Amazon or eBay.
Get it straight from the manufacturer. They both have fast shipping worldwide.
If you’re still here, thank you.
This was a long piece. But I wanted to really go into some depth in it so that it’s actually useful.
It turns out that a simple question like “why are crypto prices falling?” requires a fairly comprehensive answer.
I hope you found this article helpful, useful, or even entertaining.
If I could leave you with one parting thought it would be this: always do your own research when it comes to crypto… or any investment… or any big decision.
And if you’re not yet a subscriber to coin confidential, then you can subscribe here for free.
I’ll be publishing many more crypto features like this one. And subscribing ensures you won’t miss them.
It also helps to convince me it’s worth putting all the hours I do into this site.
The more subscribers I get, the easier it is to justify writing another article to myself.
If I know people are finding them useful, I will keep going.
Thanks for reading.
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Stock market crashes: https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets
Bernard Baruch quote: https://money.cnn.com/magazines/fortune/fortune_archive/1996/04/15/211503/
Number of people invested in the stockmarket in 2018: https://www.statista.com/statistics/270034/percentage-of-us-adults-to-have-money-invested-in-the-stock-market/
Bull and Bear markets: https://www.investopedia.com/ask/answers/bull-bear-market-names/
Seven crypto exchange hacks in 2019: https://www.coindesk.com/upbit-is-the-sixth-major-crypto-exchange-hack-of-2019