The reason why crypto crashes is easier than you might think, you just haven’t analyzed the market the right way.
Anyone who ever tried crypto trading have faced the reality of a large drop in the markets. You wake up to find your favourite altcoins down -25%.
Why is this happening so often in the crypto market?
In this article I will break down the real reason to this mystery. I will teach you a few very simple ways you can start analyzin the crypto market today.
Why crypto crashes has mainly to do with insufficient liquidity from market makers on cryptocurrency exchanges during larger sell offs. Once the market starts falling, the lack of buying support amplifies the fall and a negative feedback loop starts. Since there are no buy orders to absorb the sell orders. The market will free fall until the bulk of the sellers have sold, causing a crash.
Simple crypto crash explanation
I will now explain this in further detail and go through each step of the process.
I’ve put a picture below that represents one of many crashes in crypto history. This is not one of the larger downturns and it’s not one of the smaller either. It’s fair to say this crypto crash was “normal”.
This image is a screenshot of bitcoin back in early 2019 but the idea translates to all altcoins as well.
Once we’ve gone through these steps I’ll make sure you never view the crypto markets the same way. You will also learn how to easy spot these crypto crashes before anyone else!
Simple step by step crypto crash explanation:
- Crypto market makes significant gains
- First crack from highs is made with higher sell volume
- Market struggles back to previous highs with decreasing volume
- The crash starts when exhausted buyers fail to meet sell supply
To truly understand how your favourite altcoin behaves and profit from it, try to generalize the behaviour.
Don’t go into detail too much.
This is why I made the step by step explanation so simple. This specific trading behaviour follows the same pattern every time and it’s not complicated.
You don’t need to know more about this behaviour. It will only make things difficult and you will miss the important part.
Here is a quote I really like and I want you to let it sink in before you keep reading.
- Most people don’t like simple, but I love it. For me simple means robust.
The gentleman who quoted this is called Larry Hite, a very successful investor and market speculator.
Why everyone lose money during a crypto crash
The key takeaway that is going to make you a better crypto trader is to understand that this is a trading behaviour. The fact that this is a behaviour makes it not only repeatable, but also predictable.
Side Note: This behavior happens in all altcoins as well, over and over again but in different size and shape.
Why this is so important to understand in regards to why crypto crash is very straight forward.
But this is where most crypto investors get it wrong.
Pay extra attention now. Make sure you read this part twice because this might be a game changer for you.
Most crypto traders focus on how the market looks instead of focusing on how the market behaves.
Why is this so important to why crypto crashes and what’s the difference?
The difference is that it’s impossible to learn anything from the altcoin market if you keep analyzing the appearance. Because it never looks the same!
By the way. With appearance I mean the looks of traditional technical analysis like head & shoulders, bull flags and triangles.
These techniques are flawed.
They are based only on how the market looks and the market never looks the same, but traders keep trying to nail these setups.
The behaviour of the crypto market on the other hand stays the same all the time.
And this is where 95% of all traders get it wrong.
But your trading approach has just changed!
Think about this for a second.
How many times have you spotted a double top, a rising wedge or a head & shoulders formation that did exactly the opposite of the examples?
Exactly, way to many times.
Market participants have been trying to analyze the markets this way for decades and are now trying to apply the same principals to the crypto market and altcoins.
But it just doesn’t work.
The same theory goes for the reason why crypto crashes, it’s a behaviour that repeat itself.
You can learn this behaviour and turn these horrible crashes into sweet profits by shorting the market.
How you profit from crypto crashes
I’m all about simple but very robust trading ideas. So far we have discussed how and why the crypto market crashes.
To understand how you are going to profit from these new opportunities you have to change one thing about how you view the altcoin market.
When you do this, your trading will never be the same again.
When you analyze your favourite altcoin or crypto in general, you need to apply the step by step explanation. No matter how the market looks!
Sounds too simple? Yes I thought so.
The wonderful thing about simplicity is that:
- You will remember the process
- You will actually apply it to the market
In the beginning this is a bit tricky because the first thing you see is how the market looks.
But try to look past this.
You need to train your eye by going through the steps over and over again. Soon will you start to see this trading behaviour as a pattern. It will take some time and you will get confused with the different size and shape of the market.
But keep at it!
When you nail this technique you don’t have to worry about why crypto crashes ever again.
You will be busy adding to your short positions!
Why crypto recover so fast after a crash
I took a screenshot of a crash where the crypto market and altcoins recovered very fast. This was huge down turn of almost -45%.
It took the market only 10 days and 15 hours from the time altcoins and bitcoin hit the bottom. Then we saw a massive jump in almost all cryptocurrencies. The following uptrend lasted for almost a month.
There is nothing unique about this particular setup. It’s just one of many times where the crypto market recovered very fast after a crash.
To add knowledge to your new crypto crash setup. I’m going to give you one of the most simple explanations to why crypto recover so fast. Even after a crash of more than -30% to -40%.
Sometimes it takes only two to four weeks after a larger down turn in the bitcoin and altcoin market until we start to see big green days again.
It’s almost as the market brushed everything off and forgot what happened two weeks ago. Meanwhile most altcoin traders are lifting their eyebrows while asking:
How is this possible?
It’s a very good question. I’ve asked this question so many times that I got tired of it and I solved this mystery.
If you’ve stayed with me this far, you are going to be really excited about this final altcoin and crypto trading tip. Read this next part slowly to fully understand this phenomena.
The answer to this question has a lot to do with the first part I wrote in the quick answer.
The crypto market and the altcoin exchanges out there are still in early days and not fully developed.
Most altcoin exchanges are missing sufficient liquidity to support the market during daily trading. This causes crypto crashes to occur very frequently as you may have experienced.
Why crypto crashes without Market Makers
There is a difference between the crypto market and the traditional market.
To understand better I’m going to give you a short explanation.
This is how the liquidity problem is solved in the stock market.
There is a way to prevent these daily, weekly and monthly crashes in the stock market. Certain companies have specialized themselves to act as liquidity providers and they support the stock market with buy and sell orders.
That’s all you need to know.
The technical aspect of how it works is another topic but for now we are going to stick to the basics.
These companies are called Market Makers, and they do exactly what name sounds like, they make markets. They provide buy and sell orders in the order book for most of the stocks traded on the exchanges.
Why this is important to the markets are for two reasons:
- Investors and traders can buy or sell large quantities of stock
- They protect the stock from large spikes both up and down caused by large buy and sell orders
The market makers in traditional exchanges are doing a very good job of keeping order in the market. They are also providing liquidity to big institutions or large private investors who may want to buy or sell in bulk.
This sections is very important so make sure you follow me here.
Going back to the crypto market and the altcoin exchanges we see that there is a very important ingredient missing here.
The altcoin market does not have market makers like the traditional stock market.
I’m sure there are smaller versions of market makers operating on different altcoin exchanges. Though none of them have the capacity to make an orderly market every day, week or month.
This creates a problem and an opportunity for all altcoin traders.
How you use this information to your advantage is very simple.
You see, when the crypto market is experiencing a crash. There is no one to support the market so all the altcoins over all crypto exchanges goes into freefall.
This free fall doesn’t just suddenly stop for no reason?
This is a trading behaviour aswell like we discussed earlier. This time the market is behaving differently but you as a trader can still predict this and see a pattern.
Here is the simple explanation to the question:
- The crypto market will stop falling when the bulk of the sellers have sold everything
The reason the altcoin market is able to recover so fast after a crash is because there are no market makers to stop the fall to begin with.
And when there is no one to support the market, the market falls very fast.
To further explain why the market recover with in days after a crash is the fact that there are no sellers left.
They all flush out during the first or the second wave of selling and this is usually accompanied by increased volume.
Next time the market goes into free fall.
Be ready to pick up the market again when you spot this trading behaviour, it might be what you need to take your crypto trading to the next level.
Crypto crashes are no longer crashes, they are opportunities you are now able to predict, trade and profit from.
As I explained during the intro, the reason why crypto crash is easier than most traders would think of.
You have learned the simple ideas behind this trading behaviour. Repeat the process I explained and you will soon be a master of crypto crashes!
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Several times per year. More often than the stock market.
Most of the Altcoins fall simultaneously during larger downturns.
As long as the Crypto market is trading without Market Makers, these crashes will stay the same.