Crypto markets can sometimes behave like an untamed beast, swinging wildly between peaks and dips in a way that causes panic amongst investors. Many newcomers who joined crypto in 2021 got to experience this volatility for the first time when the crypto market erased more than half a trillion dollars throughout May 2021. The sharp nature of the drop has many people asking. Will Bitcoin crash again in 2021, or is the worst behind us?
While no one can know for sure how a volatile market such as crypto will react, taking a broader perspective can provide us with the necessary tools to thrive regardless of market conditions.
Markets are dominated by two primary emotions – fear and greed. Bull markets tend to ramp up the greed in the market and encourage risk-taking, while bear markets instill fear in the market and cause investors to switch to a risk-off mode. While this is true for all sorts of markets, it seems like these emotions are much more powerful in crypto.
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We can see this easily if we compare Bitcoin crashes to crashes in stocks. If we define a crash by a single-day price drop of 10% or more, then there have been 29 Bitcoin crashes in the last five years. Meanwhile, the stock market has lost over 10% in a single day on only four occasions, two of which happened during the Great Depression way back in 1929.
Bitcoin crashes are often fuelled by significant, abrupt shifts in the cryptocurrency sector, which cause frightened investors to flee in droves. Though technological factors may substantially impact Bitcoin’s price, macroeconomic events, major company announcements, and abrupt changes to foreign regulations and policies seem to be the catalysts for massive crashes.
On April 10, 2013, shortly after the U.S. presidential election, Bitcoin experienced the biggest crash ever. Bitcoin prices fell over 73.1 percent in 24 hours, according to Bistamp data, from a peak of $259.34 to a low of $70. A few weeks earlier, the Financial Crimes Enforcement Network (FinCEN) declared bitcoin exchanges needed to register as “money transmitters,” which likely contributed to the market uncertainty. Of course, Bitcoin has risen tremendously since then, mostly due to the market adapting quickly and learning to work within an evolving regulatory system
Following the World Health Organization’s declaration of the coronavirus as a global pandemic, the notorious crash of March 12, 2020 takes the top spot as the largest crash, with rates falling 38%, from $7,945.90 to $4,916. March 12 2020 is an example of a ‘black swan event’ – a highly improbable event with dramatically negative consequences. However, central banks went on an epic money printing spree in the aftermath of the March 20 crash that sent asset prices soaring. Bitcoin was one of the biggest gainers as a result and is up over 750% since that crash.
Why Did Bitcoin Crash?
Two main reasons drove the May 2021 Bitcoin crash – Elon Musk and China. Let’s start with Musk.
It’s no secret that the Tesla CEO can move markets singlehandedly, and he proved his powers yet again on May 13th when he walked back Tesla’s earlier decision to accept Bitcoin as a means of payment because Bitcoin “isn’t environmentally friendly.” While it might seem confusing as to why he made a statement against Bitcoin’s energy consumption so soon after promoting the asset, it’s important to note that Elon Musk has to play nice with the energy regulators crucial to his business.
Musk sold none of the Bitcoin that either he or Tesla owns.
On the China front, the world leader in mining is beginning to pressure Bitcoin mining in its country. No less than the Vice Premier of China, Liu He, was quoted as saying that the Chinese Communist Party would “clamp down on bitcoin mining and trading activity,” sending waves of panic across both Chinese miners and the market as a whole. As China, which controls over 60% of the world’s mining, takes steps to restrict mining, Chinese miners are trying to find other countries to relocate their machines.
China threatening to ban Bitcoin mining is nothing new, and this specific angle of FUD (fear, uncertainty, and doubt) is likely to resurface in the future. It’s important to keep three things in mind when it happens.
- Bitcoin mining leaving China is good for the overall decentralization of the network since it makes mining more competitive for other countries. If China doesn’t want all that Bitcoin, US, Europe, Latin America, Asia – you name it, they’ll take it.
- Chinese miners are the biggest users of coal energy. By restricting mining activity, China is indirectly facilitating the shift to renewable mining.
- The self-regulating nature of Bitcoin’s mining algorithm makes it easier to mine a Bitcoin when the overall hash rate drops, which attracts more miners into the game.
In addition, Elon Musk and Michael Saylor brought together North American miners to form the new Bitcoin Miners Council, a body dedicated to accelerating the shift to renewable mining.
How To Prepare for Anything
The data shows that most recent sellers brought in around $60,000, suggesting that newcomers had trouble stomaching their first sharp correction. At the same time, bitcoiners weren’t afraid to follow their belief and buy the latest dip. The fundamentals haven’t changed. On the contrary, the conditions today are better than ever. Individuals and institutions that buy into the vision and execution of Bitcoin have been scooping up coins and are less likely to sell them in a panic.
Surviving and thriving on Bitcoin is about taking a long-term view, say five or ten years, and then holding onto Bitcoin for dear life. The HODL philosophy requires a cool, calm conviction born out of a deep understanding of why Bitcoin is so essential and how tremendous its true potential is.
Our ‘What is Bitcoin’ series is an excellent place to add to your knowledge and strengthen your conviction about Bitcoin. If you’re ready to jump straight into the HODL life, buy Bitcoin on Coinmama today!