What is a Cryptocurrency Crash & How to Predict Them?
A cryptocurrency crush occurs when the price of a popular cryptocurrency like Bitcoin suddenly plummets overnight, wiping out fortunes in the process. Very much like the recent bitcoin’s rapid overnight plunge.
Within the span of just under three months, Bitcoin, accounting for about 40% of the crypto market, has not only hit a high of $64,000 but also crashed to around $30,000 before slightly correcting to $37,000. Any wise investor would tell you that this level of volatility is the kind of stuff high-blood pressure and panic attacks are made of when dealing with the cryptocurrency market.
While volatility is an innate part of the cryptocurrency market, these digital assets have still managed to see exponential growth over the past few years as hordes of speculative investors try their hand at what could be extremely quick profit. For the most part, many of these investors ride an upswing when the bitcoin prices are bullish. A few stick it out while many sell when the market turns bearish, which, in itself, kind of exacerbates the erratic gains and losses.
As profitable as it can be, the issue with the cryptocurrency market is that it’s easily affected by government regulations and statements from high-profile individuals who are part of this digital currency world.
The Elon Musk and Chinese Effect
On May 12, Elon Musk, CEO of Tesla, said that the automaker would no longer accept bitcoin as a form of payment for their vehicles. He cited concerns over the massive carbon footprint left behind by the process of mining bitcoins which is quite energy-intensive. After that, bitcoin prices fell an astonishing 12%.
While Elon Musk continued to cause mayhem within the markets with his contradictory tweets and comments, the cryptocurrency crash was yet to see a further dip when the Chinese government entered the fray. The Vice Premier of China, Liu He, announced that the government would crack down on bitcoin mining and trading. China sighted the highly volatile and extremely speculative nature of bitcoin trading as some of the key factors that led to this decision.
How Can You Predict Cryptocurrency Crashes?
Like almost every other currency in the market, the price of Bitcoin, Ethereum, and every other cryptocurrency in the market changes on a day-to-day basis. The only difference is that with digital currency, the fluctuation is much more pronounced. This is mostly because:
- This type of currency is quickly gaining mass media coverage
- There is just too much speculation going on in the cryptocurrency market
- There are only so many coins available
There is no doubt that crypto hype has hit an all-time high, with every interested investor dreaming of making it big, thanks to these massive price fluctuations. However, like all other commodities in the market, cryptocurrency dances to the tune of supply and demand.
Unfortunately, unlike traditional currency, cryptocurrency doesn’t have the backing of central banks to stabilize the market and protect traders from erratic price changes. As such, even the slightest bit of media coverage on these digital coins can either send the prices skyrocketing or plummeting.
So how can you predict cryptocurrency crashes to protect yourself? Here are a few tips on how you as a cryptocurrency trader can predict what the cryptocurrency market is going to do:
1. Listen to the News
Regulations created by countries such as China combined with other restrictions from private companies such as Tesla directly impact the price of cryptocurrencies such as Bitcoin.
The worse news you hear about this particular market, the lower the prices will likely go. The trick is to keep your ear to the ground about financial and regulatory news from major economic players around the globe.
2. Consider Expert Predictions
The same way a statement or a Tweet from Elon Musk can send the prices of Bitcoin plummeting, predictions from industry experts can give you an insight on where the market is going to go. Granted, when it comes to things like Bitcoin Futures, no one really knows for sure, but there are educated guesses that could help guide your speculation.
For example, John McAfee of McAfee Security has a very high opinion of Bitcoin and believes the prices will keep rising through 2021 to reach an all-time high of over $1,000,000. Although this didn’t happen, Bitcoin’s prices significantly increased and even reached an impressive price of $40,111. Investors who listened to McAfee, despite not making a million dollars, did make significant capital gains.
On the other hand, there are industry experts such as Saxo Bank who have issued outrageous predictions about cryptocurrency – Bitcoin in particular. The expert at the bank says that Bitcoin will go above $60,000 within the year 2021 then crash and lose more than an astonishing 98% of its value. Experts at the bank believe that this crash will be engineered and driven by new regulations on the digital coin.
3. Keep an Eye on the Supply
The price of precious metals such as gold is determined by how rare they are to find. That’s why when a new gold mine is discovered, the overall price of gold takes a slight dip until the capacity of that gold mine is determined, and then the market corrects itself. Bitcoin and other cryptocurrencies are much the same. The more they get mined, the less rare they become, and therefore the lower the prices go.
However, since digital coins, such as Bitcoin, are not infinite (there are only 21 million Bitcoins available for mining), the more Bitcoin miners find these coins, the more valuable they will become. At the moment, about 18.5 million BTC have been mined.
While it’s predicted that the final Bitcoin will probably be mined more than 100 years from now, it stands to reason that the more these coins get mined, the more valuable they will become as they approach that finite point.
If there are no more possible coins to be mined, what is available will become much more valuable, and every transaction will carry with it a heftier reward. This, however, isn’t to say that there won’t be a lot of ups and downs along the way.
4. Beware of Rampant Promotions
Since the digital coin market fluctuates wildly based on media coverage and celebrity involvement, keeping an eye out for rampant promotions of specific digital currencies should be a priority.
Recently, John McAfee and his Jimmy Gale Watson Jr (his bodyguard) were accused of manipulating the market and charged with fraud. McAfee promoted different cryptocurrencies like Verge, Reddcoin, and Dogecoin to his massive social media following to inflate the prices and make a profit.
These kinds of rampant promotions by influencers are likely to give the prices a boost due to their artificial demand. This demand is then inevitably followed by a crash once the market or the authorities catch on.
5. Keep an Eye on Market Corrections
The stock markets are inherently cyclical and correct from time to time. Anytime you see a prolonged bullish market, it’s reasonable to presume that a bearish market is just around the corner. This has happened with Bitcoin and many other major cryptocurrency coins throughout their existence. While riding the wave of capital gains can be sweet, being able to see the crash coming can save you a great deal of money.
Whether you are trading in the world’s largest cryptocurrency or rub shoulders with cryptocurrency backers, the truth is quite simple, the market will fluctuate, and you may make or lose money depending on which side you land. Being able to predict these movements will make a difference in whether you make money or lose it.