Bitcoin recently fell below the $20,000 mark for the first time since December 2020. This mark is a psychological level for investors and prices could really move very fast towards zero, once it crosses this level. To understand how things could turn out , we need to take a memory lane to the history of past bitcoin crashes.
No 1 June to November 2011 (-93%)
During this time, bitcoin crashed from $29 to $2 . It was not actually a real crash as Mt Gox, the topmost centralized exchange was hacked and users accounts were manipulated to crash prices. The point to note is that technical failures, especially security breaches do hurt prices, but never permanently
No 2 August 2012 ( -57%)
Bitcoin crashed briefly in August 2012 when a Ponzi Scheme named Bitcoin Savings & Trust stopped paying out weekly returns as promised. This is similar to some of the failures in DEFI (Decentralized Finance) space in recent weeks. The red flag is always the promise of returns that are two good to be true. This was the cause of Terra Luna failure. Therefore , there is a need conduct a thorough assessment of what various projects offer.
No 3. April 2013 (-87%)
Bitcoin crashed by 52% in about 6 hours because price have risen too fast in the preceding 4 months. Apparently, investors were taking profit en-masse. However, Mt-Gox failed to act properly by allowing trades to continue, which led to further price slide. A Binance of today would normally suspend trade to allow the market to cool-off , a normal practice called “circuit breaker” in stock exchanges. Such a major crash in few hours is known as “flash crash” and the only way to avoid being hurt by it is to avoid trading with leverage, i.e borrowing money from an exchange to trade.
No 4. December 2013- January 2015 (-84.6)
In November 2013, bitcoin was on steroids and rose from $260-$1150 dollars in early December. Of course, after a strong rally like this, correction must take place. The issue was aggravated by Mt-Gox again, when they announced a loss of 850,000 bitcoin and filed for bankruptcy .
No 5. December 2017- December 2018 (-83%)
In 2017, Bitcoin moved from $1000 to $17,000 in December. Such a massive rally will normally experience a similar level of correction. This correction was also induced by threats from the US Financial authorities to regulate cryptocurrencies and investors were not so clear about how this would pan out.
No 6. April 2021 – July 2021 (-52%)
Bitcoin moved from $62,384 in April 2021 to $29,865 in July 2021 as a result of the ban of cryptocurrencies by the Chinese government. The decision was based on the claim that bitcoin mining consumes too much electricity, which is harmful to the environment. The crypto community responded effectively by relocating their mining operations away from China to more accommodative countries. In addition, many crypto projects also pivoted away from the “Proof of Work” method of validating transaction to the “Proof of Stake”. Ethereum, the second largest cryptocurrency is at the final stages of migrating to Ethereum II, which runs on PoS protocol.
No 7. November 2021 till date (69-6%)
The current crash is actually not a crypto crash, but a general financial market crash. Which is induced by the decision of the US Federal Reserve to raise interest rate in a bid to curb the inflationary pressure ravaging the global economy. The current policy rate is 1.75%, with a possibility of further increases before inflation is finally tamed. The higher interest rate is attractive to investors who are seeking safety from the current economic uncertainty. Therefore, they are moving away from risky assets like stocks, cryptos etc in favour of safety assets like bonds.
Going by the dynamics of the previous crashes and how bitcoin bounced back, we are in no doubt that cryptocurrencies will bounce back once again. What would have been a killer blow to crypto is an outright ban on Cryptos by the United States. However, President Biden’s Executive Order on clearly shows that the US will always support innovation, however there is a need for regulation to curb various forms of abuses in the cryptocurrency space
Therefore the current price level is another “gift from the gods” , though there is possibility that price goes further down towards $10000 until the issue inflation and interest rate issue is concluded. In the mean time, investors should keep on learning learning about the opportunities in the cryptocurrency space.