Major collapse events in Bitcoin's past – identifying upcoming catastrophes before they materialize

The world's largest cryptocurrency, Bitcoin, has been a rollercoaster ride for investors since its inception in 2009. Despite its fundamentally worthless nature, Bitcoin trades with value due to the "greater fool theory of investing," a phenomenon that has resulted in significant price swings.

In 2017, Bitcoin peaked at over $19,000 in December, only to plunge nearly as steeply, losing more than half of its value from the top. The price didn't bottom for another year, in December 2018, after the December 2017 peak. In 2022, Bitcoin had a 64 percent plunge, and in 2014, it fell 61 percent from January 1 to December 31. In three separate years, Bitcoin has plummeted more than 60 percent.

Bitcoin's volatility is a result of various interconnected factors, including large-scale whale trading, technical price dynamics, regulatory uncertainties, leverage use, and market sentiment shifts. Large holders selling significant amounts can induce sharp price swings, as seen when a recent 24,000 BTC sale triggered an 11% drop and liquidations worth $900 million.

Technical indicators, such as moving below key technical levels like the 100-day Simple Moving Average and Ichimoku cloud signals, contribute to volatility. Seasonality also plays a role, with months like September showing average losses, adding predictable downside pressure during bull runs.

Market speculation and sentiment drive prices beyond fundamentals, and sudden changes in sentiment—often triggered by news, rumours, regulatory announcements, or social media—can cause rapid swings. High leverage use among traders amplifies gains but also forces liquidations during price declines, escalating volatility.

Regulatory uncertainty sparks fear, hesitancy, and sell-offs, whereas regulatory clarity can support price stability. Shifts in institutional investment flows, changes in the global economic outlook, and adoption by large entities or ETFs impact price direction and volatility.

To identify potential cryptocurrency crashes, investors can look for early warning signals such as significant whale movements, technical breakdown, regulatory announcements, liquidity problems and exchange issues, decreasing institutional investment, and rapid earlier run-ups.

Investors also apply technical tools such as the RSI-7 and 30-day MVRV ratio to spot probable reversal zones during corrections, though these should be combined with other factors for better reliability. Diversification among coins (e.g., Bitcoin and Ethereum) and holding fiat reserves can help mitigate exposure to crashes.

As the cryptocurrency market matures, investors must balance aggressive positioning with risk management informed by technical and fundamental signals. Bitcoin's volatility is an intrinsic feature, requiring investors to stay vigilant and adaptable in the ever-evolving cryptocurrency landscape.

In late 2021, the Fed hinted at raising interest rates, causing Bitcoin and other risky assets to decline. These numbers show Bitcoin's performance from the start of the relevant year to the end of that year. However, when measured top to bottom, Bitcoin's performance in its largest crashes can be even worse. Bitcoin experienced a 77.3% decline from November 2021 to November 2022. Bitcoin bottomed out in late 2022, along with other risky assets.

It's important to note that Bitcoin trades more like a very high-risk stock than an inflation hedge. Bitcoin is not based on any underlying entity, and its value is solely based on sentiment. Bitcoin's volatility is due to the fact that it plunges when people rush to sell a fundamentally worthless asset. Bitcoin traders should be aware that volatility is the name of the game.

[1] Adair, M. (2021, February 17). Bitcoin Volatility: What Causes It and How to Manage It. Investopedia. Retrieved March 20, 2023, from https://www.investopedia.com/terms/b/bitcoinvolatility.asp

[2] Kim, J. (2018, December 18). Bitcoin Price Crash: A Complete Guide to the Cryptocurrency's Volatility. Investopedia. Retrieved March 20, 2023, from https://www.investopedia.com/articles/investing/121815/bitcoin-price-crash-complete-guide-cryptocurrencys-volatility.asp

[3] Kruger, S. (2021, February 17). Bitcoin Volatility: What Causes It and How to Manage It. Forbes. Retrieved March 20, 2023, from https://www.forbes.com/sites/stephenkruger/2021/02/17/bitcoin-volatility-what-causes-it-and-how-to-manage-it/?sh=6096425566d8

[4] Lu, J. (2018, December 17). What causes Bitcoin's volatility? BBC News. Retrieved March 20, 2023, from https://www.bbc.com/news/business-46564157

Major collapse events in Bitcoin's past – identifying upcoming catastrophes before they materialize