The cryptocurrency bubble that occurred from 2017 to 2018 was the reason why the existence of Bitcoin came to the attention of many people. The value of all cryptocurrencies including Bitcoin has greatly increased.
The rise in the price of Bitcoin has become a hot topic, in the financial world in particular, and has been volatile at over 100%. It is a currency with significant rise, but the rate of decline is also remarkable, and it has also fallen sharply from the latest high in the span of several years.
In this article, we'll take a closer look at the reasons for the crash. I will explain in detail the reason why the crash is also a scary aspect of Bitcoin and the method of predicting a certain crash beforehand.
- 1 Reasons why Bitcoin crashes
- 2 Bitcoin crash that occurred in the past and its background
- 3 How to predict the fall of Bitcoin in advance?
- 4 What to do when Bitcoin crashes
- 5 Summary
Reasons why Bitcoin crashes
Bitcoin is still an immature market, so it is attracting attention as a speculative product.
Also, compared to the stock market and foreign exchange market, the amount of inflowing capital is small, so the market is greatly affected by large-scale investors and institutional investors. Check out various factors.
One of the factors of decreasing miners is due to the deceleration of the hash rate.
Bitcoin is a currency issued by mining, but at this time, the mining process of the blockchain is performed by the miners. And the term that measures the speed of mining is called "hash rate".
If this hash rate (the speed of mining) decreases, the electricity expense required for bitcoin mining work increases.
Then the miners gradually decrease, and the hash rate slows down.
The more miners there are, the higher the hash rate will be, but the number of miners decreases, so the number of miners becomes limited.
In this way, credit uncertainties about the Bitcoin network will occur, and becomes a factor to sell in the market.
Mass sale by large investors and institutional investors
Cryptocurrencies are not fully equipped with a radical trading form such as futures trading.
However, bulks of money from large investors and institutional investors, commonly known as "whales," have been observed to make Bitcoin volatile.
For example, a large amount of Bitcoin is sent to the wallet of an overseas exchange. There are also mass sales that can cause a range of $1000 decline in tens of minutes to hours.
At this time, the price has fluctuated significantly due to the loss cut of the trader doing leveraged trading.
In addition, the cryptocurrency market is an immature market, so regulations are weak, with large price fluctuations depending on the securities exchange.
Therefore, there is no "stop high" or "stop low" when the bitcoin price moves, so price fluctuations of 10% or more per day are likely to occur.
Concerns over the impact of cryptocurrency regulations in countries around the world
There are various stances taken regarding the views about cryptocurrencies depending on each county around the world.
The nation is showing its stance toward cryptocurrency against the backdrop of the economic situation and social factors of each country, such as supportive, neutral, and oppositional positions.
In 2018, legislation on cryptocurrency regulation was advanced by countries around the world.
The reason is to protect investors in the speculative crypto market. We hope for a new legislation that holds promise as a new form of technology and finance.
However, in China and India, it has been announced that cryptocurrency itself may be banned, which has become a source of uneasy selling in the market.
Nonetheless, China and India have negative opinions about cryptocurrencies, but since there are many countries that change their opinions, no clear answer has been given.
Bitcoin crash that occurred in the past and its background
Speaking of the crash of Bitcoin, there is a big crash in January 2018, but it has happened every few months to several years.
It's a phenomenon that rarely happens in other financial markets, but you should keep in mind the background of the frequent Bitcoin crash.
Here, I will introduce the three cases in which similar factors could cause a crash.
December 2013: Crash due to the Chinese government's ban on handling bitcoin
2013 was a year of global crisis due to the financial crisis in Cyprus. At that time, Bitcoin became the focus of attention around the world as a new currency refuge.
On the other hand, in October 2013, Mr. Ross William Ulbricht, who operated the exchange "Silk Road" for using bitcoins for criminal purposes, was arrested, and recognized by many people.
A large amount of Chinese yuan also flowed into Bitcoin from a series of events.
However, in December 2013, the Chinese government banned the handling of bitcoins at financial institutions.
Bitcoin, which had risen to the 100,000yen level due to strict regulations, has dropped to the 70,000yen level (In the market at that time, a 30% decline would be a sufficiently huge drop.)
May 2017 Catastrophe due to bitcoin splitting problem
Those who have interest in cryptocurrencies may have heard about “Bitcoin Cash” that was created after the hard fork of Bitcoin.
Hard fork is to create a new currency function by modifying the specifications of the cryptocurrency block chain.
In the case of Bitcoin, it was done due to technical disagreement by the development team, and it was sold disgustingly in the market due to uncertainty about the future.
January 2018, the catastrophe from the coin check hacking incident
A major new event in my memory is the Japanese coin exchange hacking event, which occurred in January 2018.
A total of 58 billion yen was damaged by the hacking of the currency called NEM (XEM), which was handled by Coincheck.
This is the highest hacking case ever, affecting the world's markets.
In addition, the price of Bitcoin had risen significantly, such as exceeding 2 million yen, but it fell to the 400,000yen level around November 2018.
How to predict the fall of Bitcoin in advance?
As mentioned above, Bitcoin is a currency that often has the characteristic of crashing.
Therefore, it would be nice to be able to predict in advance the vibes and timing when Bitcoin is likely to crash.
Here, I will explain what you can do to detect the possibility of a crash, even if you cannot predict the Bitcoin crash 100%.
Let's focus on Bitcoin's Volatility Index (VIX)
One of the methods of market analysis is the Volatility Index (VIX).
VIX is an abbreviation for Volatility Index, and the average number is usually about 10 to 20. The higher the number, the more likely investors are to fear the future of the market and the more likely it is to crash.
Bitcoin and VIX draw an inverse correlation chart, and when VIX rises, the price of Bitcoin tends to fall. On the other hand, it is said that the bitcoin price will rise as VIX falls.
Since VIX is a numerical value indicating the degree of volatility of the market, creating the desire to quickly withdraw funds from highly volatile Bitcoin when a high numerical value appears.
Let's check the transaction problem of Bitcoin
Next, I would like to introduce the transaction problem in Bitcoin. If you get stuck in remittance due to an increase in Bitcoin transactions, you will need to spend a lot of money.
Not only that, but fees also get higher because of the fast execution of Bitcoin transactions.
In this way, it is an important indicator since it will lead to price decline due to decrease in expected value for Bitcoin and credit uncertainties.
Always check SNS/information site
There are various opinions about the price of Bitcoin on SNS and cryptocurrency related information sites.
You shouldn't swallow all the information, but search for "cryptocurrency", "bitcoin", "bitcoin price", etc. in the search field and collect information regularly.
Also, an account that can confirm the transfer of Bitcoin funds is very important and will notify you when a large number of Bitcoin has been transferred.
Be careful if you send a large amount of money to a wallet or an exchange, because it is a warning to a big movement in the market.
In the financial market, cryptocurrencies are still small in scale, so a little ingredient can create a wide range of prices.
Information that may cause a crash may be released before the price changes significantly, so be sure to collect information firmly.
What to do when Bitcoin crashes
The price movement of Bitcoin is so strong that it is inevitable to crash when investing. If you experience a single crash, you might be scared of investing in Bitcoin.
Here, I will introduce what to do when Bitcoin crashes.
Be sure to use loss cut
One of the concrete ways to prevent a Bitcoin crash is to minimize losses.
Loss cut is to settle at a predetermined loss cut price when the price drops below the purchased price.
The order method is a stop loss order, and automatic settlement is available.
In addition, by setting a loss cut price, you can prevent having a mental state that you cannot sell because you are afraid to make a loss in the event of a crash.
Investors are likely to panic in the event of a crash, so mechanical settlement is also an effective method.
Take the spot Bitcoin as an opportunity to be prepared
Some who are doing spot transactions may be expecting long-term bitcoin price increases. Since it is purchased in-kind, it is also a great advantage because no fees occur such as in leveraged trading.
Therefore, in the event of a crash, it can be considered as an opportunity to buy spot Bitcoin cheaply. By placing funds in the exchange account in advance, you can place a buy order in case of a crash.
When buying, be aware of the investment saying, "don't grab a falling knife." Buy at the timing when the price has completely stopped and there is a sign of reversal.
Hedge sales in leveraged trade
Leveraged trading is different from spot trading, and it is possible to trade several times to several dozen times the amount of money.
Moreover, not only buy orders but also short sales can be applied, so you can hedge risk using cross trading.
You can hedge the loss of buy orders by placing sell orders when the market price changes suddenly, and it is likely to fall.
It is a trading method that requires experience and technique, but if you can master it, it will be a big advantage.
This time, I introduced the reason why Bitcoin crashed, the background of the past crashes, forecast of crashes, and the measures to be taken in case of a crash.
The significant movements of Bitcoin prices are attractive, but on the other hand, think of volatility when it crashes.
Bitcoin is under hacking risk of exchanges and under strong scrutiny by the government of each country, so it is not possible to fully understand when the market price will change suddenly.
Therefore, you can collect information on your own and check for blocked transfers, and
check the volatility index from time to time.
In addition, it is important to prepare in advance so that calm behavior such as stock preparation and hedge sales can be taken even in the event of a crash.
I would like you to see the crash of Bitcoin as a great investment opportunity instead of fear.