The crypto asset market has been loved by many people lately, both investors and traders. However, it should be noted that the volatility of the crypto asset market is quite high.
The volatility of the crypto asset market refers to drastic price fluctuations in crypto assets, for example, Bitcoin, Ethereum, or other altcoins, in a certain period.
It should also be noted that the volatility of crypto assets is often even higher than the volatility of assets in traditional markets, such as stocks, bonds, or fiat currencies.
In carrying out activities in the crypto asset market, both expert/professional and novice traders will certainly encounter market conditions that could be better, namely crypto crashes, making it difficult to be rational and think long-term.
Therefore, it is very important to have a strategy in dealing with crypto crashes because sharp and fast price falls in the crypto asset market can cause big losses.
So, to better understand what a crypto crash is, its causes, signs, and strategies to deal with it, see the full review below.
Definition of Crypto Crash
The definition of a crypto crash is when there is a sharp and significant price drop in the crypto asset market in a relatively short period.
The crypto crash itself occurs when there is very negative market sentiment/external events that impact mass selling by investors.
These crashes can make prices fall drastically, even in double-digit percentages or more, lasting for hours, days, or weeks.
Please note crypto crashes differ from crypto corrections even though these two terms describe significant price movements in the crypto asset market.
A crypto correction is a more balanced price decline after a previous period of strong price increases. Unlike a crypto crash, this correction is a natural price adjustment after a significant uptrend.
For information, there are several famous examples of crypto crashes in the history of the crypto market, including the crypto crash on Bitcoin in the 2017-2018 period, which put the Bitcoin price at a low of around $3,200 in December 2018.
Apart from that, there was also a crypto crash that hit Ethereum in 2018 and made the price of Ethereum drop sharply to a low of around $80 in December 2018.
Next, the crypto crash occurred in 2020 due to the emergence of the COVID-19 pandemic and the collapse of global financial markets. Next, the crypto crash also occurred in May 2021, with the Bitcoin price dropping to around $30,000 in no time.
Causes of the Crypto Crash
After knowing the definition of crypto crashes, now is the time to discover the causes. Several factors can trigger a crypto crash in the crypto asset market, including excessive speculation and negative market sentiment.
Due to excessive speculation in the market, when the prices of crypto assets experience a significant increase in a short time, many investors may be tempted to enter the market to make quick profits.
Meanwhile, it creates price bubbles that are not sustainable. When excessive speculation breaks out, and prices start to fall, there will be mass selling by investors who want to secure their profits resulting in a crypto crash.
Besides that, negative market sentiment can also be the main trigger for crypto crashes. When news/events create uncertainty/concern in the market, investors tend to get worried, which triggers mass selling.
For example, negative statements by well-known personalities, strict government regulations, cyberattacks, or security incidents on trading platforms can create negative market sentiment and trigger sharp price drops.
It is also important to note that government regulations and security attacks significantly impact the crypto asset market. Government regulation alone can have good and bad effects on the crypto asset market.
On the one hand, clear and well-planned regulation can provide trust and certainty for investors and market participants, encourage wider adoption of crypto assets, and increase public confidence in the market.
On the other hand, regulations that are too strict/unclear can create uncertainty and hinder market growth. A government crackdown will cause a sharp drop in prices and trigger a crypto crash.
Meanwhile, security attacks against trading platforms, digital wallets (wallets), or blockchain protocols will also seriously impact the crypto asset market because it undermines public trust and confidence in the security of crypto assets.
That’s not all; pu security attack can affect the reputation and trust in a particular crypto project, eventually triggering a significant drop in price and volatility in the market.
Crypto Crash signs
Do you understand what a crypto crash is and what causes it? Now, it’s time to discover the signs of a crypto crash. When a crypto crash occurs, several characteristics can be observed, including the following:
1. Significant price reduction
The main feature of crypto crashes lies in the sharp and significant price drop of crypto assets in a relatively short period, which can reach double-digit percentages or more.
2. High trading volume
Throughout a crypto crash, trading volumes of crypto assets generally increase significantly. This is because many investors are involved in selling their assets/taking advantage of price reductions to buy assets at lower prices. In this case, high trading volume will reflect the intensity of market activity and ongoing volatility.
3. Negative market sentiment
In crypto crashes, market sentiment is negative. In this case, investors and market participants are worried and anxious about the price decline that occurs.
Related to this, negative news/events can also affect the overall market sentiment. Such negative sentiment can trigger a cycle of mass selling and reinforce price reductions.
Strategies for Dealing with Crypto Crashes
After understanding the signs of a crypto crash, it is also important to know the strategies for dealing with it.
The strategy for dealing with crypto crashes involves several important steps to protect investments and manage risk properly, including the following:
1. Keep calm and don’t panic
It’s important to stay calm and not panic when a crypto crash occurs. Panic and hasty decision-making based on emotions can lead to irrational actions and potentially exacerbate losses.
2. Review and evaluate the portfolio
Second, use the time during the crypto crash to review and evaluate the portfolio. Check owned crypto assets, their performance, and risk exposure. Consider portfolio diversification by including different assets to reduce risk.
3. Limit losses and consider risk reduction strategies
During a crypto crash, protecting capital and limiting larger losses is important. Consider using stop-loss orders, which can automatically sell an asset if the price drops to a certain level.
4. Update and adjust the investment strategy
Crypto crashes can be an important reminder to check and update investment strategies. Review whether the strategy is still fit for purpose and risk tolerance and consider refining the strategy by analyzing new opportunities.
5. Stay up-to-date on the latest developments in the crypto asset market
Furthermore, keep learning and staying up-to-date on the latest developments in the crypto asset market. Keep up with crypto-related news, developments in blockchain technology, and related regulations.
6. Have a long-term perspective on investment
Crypto crashes are often a short-term phenomenon in the crypto asset market. Therefore, in dealing with it, it is important to maintain a long-term perspective in investing.
Lessons Learned from the Crypto Crash
Do you know any strategies to deal with crypto crashes? Well, now is the time to learn from the crypto crash.
The crypto crash has provided several valuable lessons for investors and market participants, including the following:
1. Learning and insight into the risk and volatility of the crypto asset market
The first lesson from the crypto crash is related to learning and insight into the risk and volatility of the crypto asset market. The crypto crash highlights the importance of having solid knowledge and understanding of the crypto asset market before jumping into it.
Education and an in-depth understanding of blockchain technology, market mechanisms, price-driving factors, and associated risks will help you make wiser investment decisions.
2. The importance of portfolio diversification and prudent risk management
Another lesson from the crypto crash is related to the importance of portfolio diversification and prudent risk management. Portfolio diversification is an important strategy for reducing risk in the crypto asset market.
By dividing the investment into several crypto assets, investors can reduce risk exposure to one particular asset/market. Diversification can also help offset potential losses with potential gains from different assets.
In conclusion, preparing and being calm to deal with crypto crashes is very important. One reason is to reduce emotional risks, such as panic and fear, in the crypto market.
With preparation and a calm approach, it will help to stay calm and avoid decisions influenced solely by emotions. Investors can later carry out an objective analysis before making a decision.
It is important to understand that crypto investing has tremendous growth potential in the long term beyond crypto crashes that can happen at any time.
In addition, the crypto market continues to present attractive investment opportunities through innovation and the developing of new projects. Of course, that will create great opportunities for investors willing to maintain a long-term view in crypto investing.