The reason why crypto crashes so often is easier than you might think, you just haven’t analyzed the market the right way.
Anyone who ever tried cryptocurrency trading has faced the reality of a large drop in the markets. You wake up to find your favorite altcoins down -25%.
Why is this happening so often in the crypto market?
In this article, I will break down the real reason for this mystery. I will teach you a few very simple ways you can start analyzing the cryptocurrency market today.
Why crypto crashes have mainly to do with insufficient liquidity from market makers on cryptocurrency exchanges during larger sell-offs. Once it 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 coins 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 ones 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 cryptocurrency markets the same way. You will also learn how to easily spot these crypto crashes before anyone else!
Simple step-by-step crypto crash explanation:
- Cryptocurrencies make significant gains
- The first crack from highs is made with higher sell volume
- Coins struggle back to previous highs with decreasing volume
- The crash starts when exhausted buyers fail to meet sell supply
To truly understand how your favorite altcoin behaves and profit from it, try to generalize the behavior.
Don’t go into detail too much.
This is why I made the step-by-step explanation so simple. This specific trading behavior follows the same pattern every time and it’s not complicated.
You don’t need to know more about this behavior. 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 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 behavior. The fact that this is a behavior 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 sizes and shapes.
Why this is so important to understand in regards to why the crypto crash is very straightforward.
But this is where most cryptocurrency 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 it 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 if you keep analyzing the appearance. Because it never looks the same!
By the way. By 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 it never looks the same, but traders keep trying to nail these setups.
The behavior of cryptocurrencies 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 too many times.
Participants have been trying to analyze the markets this way for decades and are now trying to apply the same principles to cryptocurrencies and altcoins.
But it just doesn’t work.
The same theory goes for the reason why crypto crashes, it’s a behavior that repeats itself.
You can learn this behavior and turn these horrible crashes into sweet profits by shorting coins.
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 cryptocurrency 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 favorite altcoin or crypto in general, you need to apply the step-by-step explanation. No matter how the market looks!
Related: How to analyze crypto before investing
Sounds too simple? Yes, I thought so.
The wonderful thing about simplicity is that:
- You will remember the process
- You will actually apply it every day
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 behavior as a pattern. It will take some time and you will get confused with the different sizes and shapes 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!
Are you looking to become a skilled crypto trader?
Check out our detailed crypto trading guides in our educational center.
You will learn new strategies and how to read charts in real-time.
Why Crypto Recover so Fast After a Crash
I took a screenshot of a crash where altcoins recovered very fast. This was a huge downturn of almost -45%.
It took the coins 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 when cryptocurrencies 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 as to why crypto recovered so fast. Even after a crash of more than -30% to -40%.
Sometimes it takes only two to four weeks after a larger downturn in bitcoin until we start to see big green days again.
It’s almost as if the participants 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 phenomenon.
The answer to this question has a lot to do with the first part I wrote in the quick answer.
The cryptocurrency market and the altcoin exchanges out there are still in the early days and not fully developed.
Most altcoin exchanges are missing sufficient liquidity to support the market during daily trading. This causes cryptocurrency crashes to occur very frequently as you may have experienced.
Why market makers play a big role
There is a difference between currencies and the stock 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 traditional finance.
Certain companies have specialized to act as liquidity providers and they support stocks 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 the 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 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 MMs 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.
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Going back to the crypto market and the altcoin exchanges, we see 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 cryptocurrency market is experiencing a crash.
There is no one to support the market so all the altcoins overall crypto exchanges go into freefall.
This free fall doesn’t just suddenly stop for no reason.
This is a trading behavior as well as 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 a simple explanation of the question:
- The crypto market will stop falling when the bulk of the sellers have sold everything
The reason the altcoin market can recover so fast after a crash is that 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 recovers within days after a crash are 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 cryptocurrencies go into free fall.
Be ready to pick up the market again when you spot this trading behavior, 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 a cryptocurrency crash is easier than most traders would think of.
You have learned the simple ideas behind this trading behavior. 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.