The Crypto Crash: Opportunity Emerges from Crisis
You're staring at the screen watching Bitcoin soar to $69,000. It's so exciting to watch it reach a new all-time high. You wake up the next day and you realize it dropped below $65,000. That's $4,000 down the drain! That's only the beginning, after a month Bitcoin had shed $21,000, after two months Bitcoin is down more than $27,000. Needless to say, how frustrating this is, watching your investment suddenly lose value and fast.
This isn't a new concept, any investor has the prominent fear that an investment will lose value; that's your inherent investment risk. Still, crypto is more volatile than other investments, like stocks, commodities, precious metals, etc.
Understanding the history of what caused boom and bust cycles in crypto can help you become a better investor. You'll be able to read the signs and look for external events which may be crash triggers. Bitcoin is a great case study since it's been around the longest and much of the market is still tied to it. We'll cover its crash history and then jump into the details and contributing factors of the big crashes of 2017 and 2021.
History of Bitcoin Crashes
Since Bitcoin was the first cryptocurrency, it has the longest history to review. Through this history, it becomes easier to see the internal and external influences that led to Bitcoin's wild crashes.
2017 was one of the most notable crashes, because, at that time, Bitcoin and other cryptocurrencies were becoming more popular. Still, it's important to look back and note that this wasn't Bitcoin's first crash.
Surprisingly, it crashed 4 times before the Great Crypto crash of 2017! It won't be the last time it crashes, too. That said, despite the crashes, Bitcoin's price continues to climb year after year, proving that despite its volatility, it has never crashed down as far as each previous crash. Bitcoin's value continues to grow.
The Mt. Gox Hack and Crash
In 2011, Bitcoin broke the bank when it soared from $2 to more than $32. That made it the digital silver since it achieved parity with an ounce of silver. Then, on June 19th, disaster struck when cyberattackers hacked Mt. Gox. Mt. Gox was the largest Bitcoin exchange in the world by far at that time, and attackers pierced their security and stole millions of dollars worth of Bitcoins.
In only one day, the value of a Bitcoin fell to 1 US cent. Oh, what a great time it would"ve been to buy!! Unfortunately, though, at that time Bitcoin was still relatively unknown and thought to be just a fad.
In a recent turn of events, the former owner stated that he had “found” some Bitcoin that he had planned to sell and then distribute the fiat to the Mt. Gox users that had lost their Bitcoin on the exchange. While it's a nice way to compensate those who got “hacked”, you might be thinking, as many are, that something isn't quite right with this “found” Bitcoin.
In April 2013, Bitcoin became a victim of its own success as many investors jumped into the well-publicized Bitcoin Phenomenon! Trading was so intense that Mt. Gox couldn't handle the volume, and when it crashed, the cybercriminals seized the opportunity to attack again. Mt. Gox went into an unprecedented total shutdown, sending prices from nearly $260 to $50 overnight.
Digital Ponzi: Bitcoin Lost 56%
In August 2012, the public learned that a classic Ponzi scheme had been bilking crypto investors for months. The fraudster adapted the scheme to the digital age and used Bitcoin.
According to the US Securities and Exchange Commission (SEC), “ Trendon T. Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the internet using the monikers 'Pirate" and 'pirateat40." charged, convicted, fined and imprisoned — had stolen 700,000 Bitcoins by deception.”
China Banned Bitcoin: Bitcoin Lost 50%
When China banned Bitcoin at the end of 2013, it lost 50% of its value overnight. China's relationship with cryptocurrency remains opposed as it recently launched the digital Yuan and has been introducing it to the public for use alongside the traditional paper Yuan.
According to AI Multiple, an online news outlet, “As of August 2021, the digital Yuan trials have reached ~$5.3 billion in transactions.” The Chinese government also said that it would use the 2022 Winter Olympics to promote the use of its digital currency at the Olympic events, venues, and villages.
The Great Crypto Crash: Bitcoin Lost 84%
Bitcoin was thriving in 2017! It broke its own records and touched $20,000. It also was the year it really grabbed the world's attention as more and more people started to invest in it. Then, on Dec. 27, Bitcoin's price fell below $12,000, as investors cashed in on the gains they made on the wild ride to $20,000.
The cryptocurrency would remain in lows and a bearish market throughout 2018. That was the year many investors sought an exit from Bitcoin after seeing this massive crash. Many wrote it off as the end of crypto. Throughout the year and for a good portion of 2019, crypto was way down.
The Corona Crash: Bitcoin Lost 50%
The pandemic didn't spare Bitcoin either. When the markets crashed in March 2020, Bitcoin fell even harder. Bitcoin lost half its value in two days. When the pandemic was announced and lockdowns began, Bitcoin fell from above $10,000 in February to below $4,000 in March.
The Elon Musk Crash: Bitcoin Lost 53%
In April, Bitcoin was the talk of the investing world as it soared past an astonishing $64,000 per coin. Then, in a flash, $1 trillion in value was wiped off the global crypto market in a single week.
First, Elon Musk changed his mind about accepting Bitcoin as a payment for Tesla cars. A few months later, he went on to crash DOGE and send SHIB to the moon. Then, China announced yet another crypto crackdown. Finally, the truth on the amount of energy required for Bitcoin mining came to light. Now the environmentalists have a big bone to pick with Bitcoin.
The massive electricity consumption and its effects on the environment have led many green investors to divest and have other Proof-of-Work cryptocurrencies thinking to move to a greener Proof-of-Stake system to reduce the environmental impact it would have. To get to know more about PoS, check out our blog article here.
The Second Great Crypto Crash: Bitcoin Lost 40%
The Second Great Crypto Crash started with many factors combined. First, we had the annual sell-off, then Coronavirus's Omicron variant sent cases spiking again worldwide. What's more, the US Federal Reserve stated that it'll hike rates 4 times instead of 3 in 2022. Finally, people are withdrawing their earnings and pulling out of the market to pay for everyday items that are becoming more expensive with current high inflation.
If History Is Any Indicator…
After reviewing the 7 crashes in Bitcoin history, it's apparent that Bitcoin continues to appreciate in value over time. A wise investor would perceive the crash as an opportunity to buy. As time goes on, Bitcoin becomes stronger and stronger as it gains more support. The first few crashes wiped Bitcoin's value almost completely. Still, that never stopped Bitcoin from coming back, time after time.
Now, let's focus on the most prominent crashes and see what kickstarted them and the main takeaways you can use to trade cryptocurrencies.
The Great Crypto Crash of 2017
Unlike the great stock market crash, the Great Crypto Crash didn't have any severe worldwide effects. Though, it still left some investors in a bad position, with their pockets inside out. The crypto crash also coined the term Hodl, and the cryptocurrency enthusiasts who hodl through thick and thin, not willing to sell a penny's worth of their crypto assets.
The Great Crypto Crash saw Bitcoin fall from almost $20,000 down to about $8,000 in February 2018. Bitcoin Cash also fell from $4,000 in December 2020 to around $800 by February 2018. Let's look further into some of the factors that caused the Great Crypto Crash.
The Initial Coin Offering (ICO)
ICOs took their name and idea from Initial Public Offerings (IPOs) that happen when a stock becomes publicly tradable. The many ICOs on the scene were a major contributor to the Great Crypto Crash. While the first ICO happened with MasterCoin in 2013–raising money for Ethereum at the time–it wasn't until 2017 that the ICOs caught on and became all the rage.
Many ICOs were wildly successful, like Brave browser's ICO, which generated $30 million in under 30 seconds while Kik messenger raised more than $100 million. Well-known FileCoin raised $257 million, of which $200 million was raised in the first hour.
ICOs performed so well that they literally blew expectations and collectively raised more than $2.3 billion by October 2017, 10 times more than 2016 ICOs. Each ICO performed more than 40 times better than expected by the companies that had launched them.
Even with all the money raised and the massive ICO parties, we still saw many instances of fraud. That made governments in the US and other countries impose tight federal regulations. That, in turn, led to the white-hot ICO fire being extinguished seemingly overnight. The bad apple fraudsters coupled with the heavy regulations in ICOs were also a major contributing factor to the Great Crypto Crash of 2018.
Since ICOs have all these regulations put on them, they"re becoming few and far in between, if they even exist at all. The 2017 run-up to the crash were “wild west” times for crypto. It seemed like almost anyone and their brother were launching ICOs every week. Some were legit, and others were outright scams. The wild west days of ICOs should"ve been a big red flag that the market was too hot and a cool off was about to come down hard.
Bitcoin Cash and Lessons Learned, Paradigm Change
Bitcoin Cash, a hard fork of the original Bitcoin, was a phenomenon. It had an explosive rise when it launched on Coinbase. The major price uplift was because the general populace could buy it. When they started to buy it, its price spiked even higher on Coinbase than the rest of the markets, reaching closer to $7,000 than the $4,000 real value on the other exchanges.
Yet, this massive new coin debut on Coinbase also spawned much angst towards the exchange for disabling selling at peak price, which Coinbase has now become infamous for. A lawsuit ensued, Berk vs. Coinbase, where Coinbase won. This was also the first time a new addition to Coinbase drove up the price of a crypto asset. Now investors ask the question: will the next crypto be listed on Coinbase? If it is, it has a great potential for a massive price increase.
Just a Passing Fad?
In 2017, Bitcoin and a handful of altcoins took the world by storm! We saw a meteoric rise until late December 2017 and early January 2018, when the great Crypto Crash took place. This crash was bigger than the Dot-Com bubble of 2000, where internet-based companies" stock crashed 78% from their peak. The Great Crypto Crash of 2018 wiped out more than 80% of many cryptocurrencies" the peak.
Many thought that this would be the end of Crypto; that it was going to be swept up in the dustbin of short-lived fads that produced a lot of money, like Beanie Babies and Pogs in the mid to late 1990s. A select few Beanie collectors and Pog enthusiasts sold out of their collections before the crash, making tons of money in the process. Still, they left most people holding a bag full of worthless cardboard and stuffed animals. Many people felt like that in 2018 when the crypto market crashed and many lost their shirts. The naysayers had won, crypto was dead and Bitcoin, the crypto king, was fatally wounded.
Return of the Crypto King
Where money can be made, people will be resilient and try, try, try again. We"ve learned from patterns and from the most famous adage: “What goes up must come down”. If so, what goes down must go back up, right? Well, yeah, especially if it has the potential to make money. If people see the asset's value and believe in it, then, yes, it's very likely that it'll go back up.
The cycle repeats itself over and over again, and you just need to keep that old adage in mind. You should also read the market, buy the rumor and sell the news.
2018 saw Bitcoin fall far back to a low of around $3,500 per coin. That caused many to exit the market to lick their wounds and look for something more promising. The smart ones, though, held on and took the opportunity to buy and expand their holdings.
Bitcoin has been around since 2009, but no discernible patterns have emerged until 2017 when crypto fever gripped the world. It started with the Great Crypto Crash in late December through Winter 2018. The crypto pattern revealed itself when people weren't watching.
From 2017 onwards, cryptocurrencies apparently take a dive at the end of the year and trend bearish throughout the winter. Coming with the spring, things start looking up, and investors tend to return.
That's usually because investors are taking profits and/or want some extra money for the holidays. The profit-taking usually continues at the start of the new year due to a fresh slate with the taxman. Crypto and taxes are very fuzzy in many countries. In some countries, tax collectors watch closely to ensure that they get their fair share of the revenue.
The Great Crypto Crash Redux: 2022
Currently, another great crash is happening. Since late December, the crypto markets have bled out their gains and Bitcoin has fallen once again, but not as hard as the first crash. Many factors are contributing to the Great Crash of 2022, like the never-ending Coronavirus pandemic, worldwide inflation, the US federal reserve mulling 4 rate hikes for 2022, China's crackdown on crypto, anti-government protests in Kazakhstan, and the general New Year crypto sell-off. Read on as we take a deeper dive into the factors that led to the crash of 2022.
Initially, the Coronavirus pandemic brought much stimulus money into everyone's hands. The governments intended for this extra cash to help people through a tough time.
Well, in many cases during mid-2020, we saw the stock market surge, filled with young retail investors using the Robinhood stock trading app. That sent the market flying high and turned some stocks into memes, like GameStop and AMC. Stimulus money also flowed into the crypto markets. All this extra money, created by the government, flowed into assets and equities and started to build the bubble.
This stimulus spending started to build inflation, which isn't good as governments print money and add more currency to the supply, resulting in currency devaluation. Many people are investing that stimulus and doing quite well, which equals more people with more money to spend.
This problem is further compounded by the disruptions to supply chains and people not working. Many older people took early retirement and left the workforce, which led employers to increase salaries to attract workers, further aggravating the inflation problem.
The Feds Step In, Crypto Steps Out
To curb inflation, which hasn't been this high in the United States since 1982, the Federal Reserve plans to increase the basic interest rate 4 times in 2022. As the interest rates increase, it'll cost more to borrow money. That means the era of cheap money is over for many. While high inflation is really bad for the economy, the higher rates on lending will also slow down growth. The saying that “The country was built on credit” goes a long way, and with deep consideration, it's actually troubling.
Because cheap money is going to cost more to borrow later this year, many are cashing out of crypto and spending their money elsewhere. Additionally, the crypto world always has a regulatory sword that dangles its head. Since investors don't know when it'll fall, they start selling.
The Biden administration is still trying to pass the “Build Back Better Plan”, and the thousands of legislation pages contain plans to beef up the IRS. If the IRS is stronger, audits will become more commonplace, perhaps, looking for those untaxed gains made years ago. This possibility also worries many investors.
Chinese Miners–Out of the Water and into the Frying Pan
China had two-thirds of all the Bitcoin mining in the world, until the Chinese government banned it, citing environmental reasons. Given China's high population, more than 1.2 billion, the crypto ban had very harsh effects on the crypto market. As mentioned earlier, China effectively banned crypto so that it could introduce its own government-regulated currency, the digital Yuan.
Back to the miners, if China had that many miners, where did they all go? Many of them went West to Kazakhstan, taking around 87,849 mining machines with them and setting up crypto mining there. This started out great for the miners, but things started getting bad for them as winter set in.
Despite the cheap energy prices in Kazakhstan, the grid's infrastructure can't handle all the mining, which accounts for 8% of all the electricity consumption in the country. Combine that with the extremely cold weather, the electric companies usually switched off the power to the miners, which led to many machines freezing in the sub-zero temperatures.
If that wasn't bad enough, the violent anti-government protests have made miners hopeless. Rolling blackouts, Russian soldiers in the street led miners to lose the ability to pack up and leave to a less turbulent environment.
The lack of miners has slowed Bitcoin's hashing and reduced the number of transactions per block and ultimately weighing down Bitcoin's price. Until the political situation in Kazakhstan resolves, Bitcoin will be missing many miners.
The Way Forward
Crypto billionaire investor Mike Novogratz, and CEO of financial services firm Galaxy Digital, commented on the ongoing crash. He told CNBC: “I"m not nervous in the medium term, but we"re going to have a lot of volatility in the next few weeks”. This volatility is typical during a prolonged crash with many external factors affecting the market. On one hand, Bitcoin has the first-mover advantage, and it's well-established. On the other hand, its technology is old compared to the many new altcoins rivaling Bitcoin.
This makes some investors worry that Bitcoin's price might be pushed down and held there, as investors seek newer technologies that'll deliver a return on investment. What's more, the rising inflation and the US Federal Reserve's plans to hike rates in March may extend the lower Bitcoin prices.
On the contrary, Ark Investment group CEO Cathie Wood believes the price of Bitcoin will reach $500,000 by 2026, implying a gain of more than 1,000% from its current price. She believes that institutional investors will start investing around 5% of their investments into Bitcoin and other cryptos. She asserts that the institutional support will lift Bitcoin up to that price over the next 4 years.
While everyone is entitled to their opinion, keep in mind that these are all mere predictions. You should always do your own research before you make any investments.
It always seems like cryptocurrencies have the weight of the world stacked against them, but they continue to prevail. This article reviewed the factors that drive it forward, upward, and onward, and we find that belief is the number one driving force. The people, the investors, and the creators all believe that cryptocurrency is a technology here to stay. Just like any new technology, it has to prove itself. That means it has to face many battles and challenges before being accepted.
In the early days, Bitcoin's value was reduced to almost zero twice, but it still stepped back into the ring to fight another round, time after time. Looking back, the 2017 Great Crypto Bubble parallels the Dot-Com boom and bust of 2000. Think back to how the internet looked before the year 2000. Hard isn't it? In the past 20 years, the internet has changed significantly to the point where it has become almost unrecognizable. The Dot-Com boom filtered out the market, and only the strong survived.
The survivors went on to redefine the internet into what we see today. We can apply this analogy to Bitcoin and the crypto environment as a whole. The major players carved out a place in the world for cryptocurrency, and now, they"re going to redefine what crypto can do and how the internet can interact with such a powerful tool.
The moral of the story is: don't fear the crash, turn the crisis into opportunity!
What is Bitcoin?
Bitcoin is the first cryptocurrency ever created. In 2009, Satoshi Nakamoto created it, and it's been here ever since. Bitcoin is built on blockchain technology, an immutable ledger of transactions, transparent and accessible to all. It's a decentralized digital currency without a single administrator or centralized control system.
What is a market crash?
A market crash is when a traded commodity's price falls quickly over a short time and loses more than 40-50% of its value. This same principle is applied to a market, when most stocks or cryptocurrencies fall simultaneously. Generally, one asset's sell-off might spook investors to start selling other assets. As more investors sell, the crash intensifies.
What's the difference between a bull market and a bear market?
A bull market is defined by an upwards trend in pricing for the assets and commodities sold there. Conversely, a bear market is defined by a downward trend in price. These price trends cover long periods, and aren't like that of a crash.
What is Bitcoin mining?
Mining is the critical component of the Proof-of-Work process. Mining requires mass computing power and electricity to solve complex cryptographic challenges. To verify a block of transactions, a miner must solve the equations for that block. A block is produced every 10 minutes, and the miners" efforts are rewarded with partial Bitcoin as payment. Miners typically seek places with low electricity prices to maximize profits. That's why China, Kazakhstan, and Russia are appealing for miners.
What are national digital currencies?
Digital currencies issued by a country are centralized and may be tied to the fiat currency of that country. Generally, a country might be issuing these digital currencies to ward off Bitcoin and other cryptocurrencies. So far, China and Tajikistan have issued their own digital currencies. Some other countries are also working on developing their digital currencies.
Read more about the original Bitcoin on the official website.
Read more about Ethereum on the official website.
Read more about the forked version of Bitcoin, Bitcoin Cash.
The United States Internal Revenue Service Crypto Currency Guidance
Learn more about what is taxable by the IRS on the IRS website.