3 Reasons Bitcoin Crashed & Why You Should Stop Panicking

I hope you enjoyed your bear market baptism.

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Whenever I teach someone how to get involved in cryptocurrency investing, I know that whenever the market suffers I’m going to get frantic calls from that person asking where all of their money went.

It happens every time, without fail.

I’m not complaining, I think more people in this market should go out of their way to help new investors — it’s the only way this market will grow: which is in our best interest as current investors.

What exactly has caused the recent correction in Bitcoin is hard to pinpoint.

There are several new developments regarding cryptocurrency regulations that may be affecting the price. Whatever the catalyst is, this is a normal & healthy market correction, that if anything, should bring you a sigh of relief.

Don’t Panic.

Bubbles don’t have healthy market corrections. Bitcoin (and the majority of other cryptocurrencies) just finished a historic bull market cycle.

No financial market in history has ever had as profitable of a bull run as cryptocurrency as a whole has had in the past few months.

If the price of Bitcoin were to continue rising at the rate it was — I’d get out as fast I could. That’s unsustainable growth.

That’s how bubbles burst.

I’m going to drastically oversimplify this for the sake of keeping it under 100 pages — but the recent drop in Bitcoins price can be attributed to the following factors.

1. NEGATIVE NEWS

It all starts with a little panic.

Do you notice a theme here? The Cryptocurrency market is extremely emotional.

To my knowledge, there have been three major negative catalysts that have largely aided in the downward spiral Bitcoin seems to be in.

Confusion Surrounding Indian Regulations

In my opinion, people have given this news a lot more weight than it should have. India is simply going through the process that every country will have to when their population starts to adopt cryptocurrency more and more. Much like the U.S., India is trying to determine how they want to regulate this market — but due to some statements from their Prime Minister regarding Bitcoin never being a part of their payment systems, people have started to panic.

Chinese Crackdown

There are also rumors of another Chinese crackdown on cryptocurrency exchanges and ICO’s. The Financial News released an article stating that the Peoples Bank of China would no longer be providing services for accounts tied to cryptocurrency exchanges. Keep in mind that China has tried to ban cryptocurrency over 3 times. It always bounces back.

South Korean Regulations

Credit Card Crypto Purchases Now Classified as “Cash Advance”

The U.S. recently made it so that if someone purchases cryptocurrency with a credit card, it is considered a “cash advance”. Which is not very favorable to those taking the advance to say the least.

2. INVESTORS TAKING PROFITS/CLAIMING LOSSES BEFORE TAX SEASON

Going back to my previous statement about how we just came out of a historic bull market, people are taking their profits. Bitcoin went from around $5,000 to $20,000 in an extremely short period of time. While people who bought in closer to $20,000 are panicking at the moment, investors who got in only a couple short months ago are still in the green. We’ve seen a huge amount of profit taking — as well as investors claiming losses. Claiming your capital loss offsets your capital gains tax and allows you to pay less to Uncle Sam.

3. PANIC

This is the biggest contributing factor to the recent Bitcoin crash. Cryptocurrency is unique in the sense that it is the only financial market that is made up primarily of new investors, or investors that haven’t been trained in finance.

Which means, this is the most emotional market in existence.

I’ve found that Elliot Wave theory is the best tool in my Technical Analysis arsenal for predicting price action in Crypto. The underlying concept behind Elliot Wave is that markets move in these “psychological impulse waves” which continuously go up and down as old investors claim profits\losses and new investors buy in. I could go on and on for hours about Elliot Wave, but I’ll save that for another day!

Long story short; we’re in an extremely emotional market. So when a catalyst occurs such as negative news about regulations in India, we see far more drastic price movement than we would see in a seasoned and developed investment vehicle like a traditional stock or security.

Many people who trade cryptocurrencies, have never traded before.

When you combine negative news, with the fact that tax season is coming and institutional investors/high net worth individuals are claiming their losses to offset capital gains taxation — you create mass hysteria for the not so seasoned investors that make up the vast majority of the cryptocurrency market.

One thing I want to reiterate: this is completely normal.

It would be extremely worrisome if Bitcoin didn’t retrace its price to allow new investors to come in, and let the last wave of investors who have seen enough percentage gain to be happy make their exit. I like to think of Bitcoin like a rubber-band, the lower it corrects, the higher it tends to catapult. Some would call me naive for thinking like this, I’m young enough that I’ve never lived through a multi-year bear market — but all I know is:

Buying the dip in Bitcoin has been a winning strategy since 2009.

By the way, not to sound like a crazy tin-foil hat wearing kind of guy, but it’s a pretty crazy coincidence that Bitcoin dropped in price to almost exactly where most large investment groups and financial institutions said that the risk/reward ratio would be favorable enough to enter long positions.

Footnotes