6 Reasons Why Cryptocurrencies Crash and How to Profit From It

Pretty much everyone that’s traded cryptocurrencies has probably wondered why the market crashes. So why do coins and the overall crypto market crash? Unfortunately, there isn’t one simple answer. To briefly answer the question though it’s largely a combination of news, technical analysis and manipulation.

A better question: How do I profit from these crashes? Is there an opportunity there? The answer is yes, there is. I’ll dive into a few ways to profit from crashes later in this article.

Without further ado, here are six reasons cryptocurrencies crash…

1. The Never-Ending News Media Cycle

We might as well list the most important first! Let’s face it, Cryptocurrencies often crash because of bad news.

The process goes like this:

  • Bad news is released on the various crypto news websites, people get scared.
  • Scared people exit their crypto.
  • All that selling creates downwards pressure on the price of a given crypto, or the entire crypto market.
  • The crypto or crypto market then falls.

One important thing to note is that bad news that affects an influential cryptocurrency like bitcoin will drag the entire market down. The entire cryptocurrency market is generally closely tied to the performance of bitcoin. If bitcoin’s price gets cut in half, watch out – the rest of the market will probably drop soon too.

The inverse is also true. Good news will often drive the price of a crypto upwards. It’s important to note however that this is only true if the news is unexpected. If the news is something known in advance, it will likely already factor into the price.

Some crypto traders attempt to “trade the news.” They short crypto when bad news comes out and buy when there’s unexpected good news. I don’t recommend this, as trying to trade while ignoring technical analysis is dangerous.

2. Technical Analysis AKA Patterns and Signals

This is my personal favorite reason. There are certain obvious technical indicators that even the most basic crypto trader knows. These can cause crypto to fall or crash in the right circumstances.

For example, if bitcoin is shooting up and hits $10,000, that is a huge resistance point. It may fall from there. Why? Because it’s a nice, even number. It’s a stupid reason, I know, but there it is.

Similarly, with technical analysis, there are certain universally recognized signs on trading charts.

If a cryptocurrency follows one of these patterns, more experienced traders will sell or buy. This can lead to a crash.

Specific examples of widely known technical analysis include support and resistance. Support is a price level a given cryptocurrency consistently falls to and then rises from.

Resistance is the opposite. Resistance is the price a cryptocurrency consistently reaches that it then falls away from.

Technical analysis is an extremely viable way to make money at cryptocurrency. There are pitfalls but when used correctly you can make a lot of money with it.

If you want to learn more about technical analysis and trading strategies, I recommend Quickfingers Luc’s Youtube Channel.

3. Large Crypto Sales by HODLers

This is my least favorite because it’s utterly random, can happen at any time and can last longer than bad news.

Back when bitcoin was spectacularly cheap, some people bought a lot. By “a lot”, I mean thousands or tens of thousands of coins or more. There are also early exchanges that had even more than that.

If these individuals or institutions decide now is a good time to offload some crypto, watch out. It will push the entire market down for weeks or longer.

They will literally flood the market with crypto and completely saturate the market. There will be far more supply than demand, and the price of cryptocurrency will correct downwards to reflect this.

When this happens, don’t panic. Typically you just have to be patient and wait for the extra supply to be bought up and for the price to gradually correct.

4. Market Manipulation By Large Investors and Institutions

This is especially prevalent with smaller altcoins, but I suspect it happens with bitcoin etc. as well.

With smaller altcoins on lesser known exchanges, people have programmed bots that automatically trade. These altcoins are traded at such a low volume that the actions of the bots themselves can influence the price of the cryptocurrencies. So these bots create false signals on technical analysis charts, with dozens of orders coming per minute from the same account.

The goal is to manipulate the price upwards or downwards artificially and automatically gain a small amount of profit. They then repeat this tens of thousands of times. I don’t know the nitty gritty of how they work, but those are the basics.

The other form of manipulation is institutional. If a person or company owns enough of a given cryptocurrency, they can push the price up or down by buying or selling en masse.

Here’s an example of this:

  • A large firm drives the price of a cryptocurrency from $100 down to $80 by selling a ton of it.
  • The average Joe sees this, panics and sells with them.
  • All of this selling drops the price to $60.
  • The institution that sold then uses all of the money gained from selling to buy a massive amount at $60, driving the price back upwards to $80.
  • Excited, the average Joe sees this and buys in. This drives the price back to $100.
  • The cycle then repeats.

You can attempt to profit from manipulation by the big boys, but it’s dangerous. They’re usually experts in the field of trading that have made a living feeding off of everyone else.

There’s a reason they have tens of thousands of coins to trade with in the first place, don’t kid yourself.

5. Taxes

Tax law can have a big impact on cryptocurrency sales. If there’s an advantage to selling at a certain point, that can temporarily drive the price of crypto down as everyone exits to take advantage of favorable tax law.

A lot of people may not report crypto gains on their taxes, but this isn’t true with those who have made over a million dollars. They know the IRS will come after them, so they sell when taxes are favorable.

This is a predictable aspect however, just check online at sites like Coindesk to see if there are any favorable crypto tax advantages coming up.

6. Strong Performance in Competing Markets

The final factor is if a competing market performs much better than cryptocurrency. Whether that market is traditional stocks, cash or a competing altcoin, all of these have a role in crypto’s price.

If for example, the stock market is shooting upwards, people will exit cryptocurrencies to purchase stocks. This will put downward pressure on the cryptocurrency market.

Alternatively, if there’s an altcoin that’s a direct competitor to a specific crypto, be careful. If that competitor announces very good news that gives it distinct advantages over your cryptocurrency your crypto may crash as people switch to the competitor.

If this happens, your only choice really is to wait it out. Hopefully, the trend isn’t one that will last for years. Set a stop at a certain point and if your crypto hits it, exit.

How to Profit from a Crypto Crash

There’s an art to profiting from a crash. You have to be a little ahead of everyone else, but not so ahead that you buy in the middle of the crash. This is known as “catching a falling knife” and is something you want to avoid. After all, if you try to catch a falling knife, you can end up with bleeding fingers!

Technical analysis greatly helps with knowing where to buy. Knowing at which point a trend will likely reverse can make you a lot of money.

Choose a point with incredibly strong support and set a stop a decent amount below that point. If the trend continues and pushes past your expected reversal point, exit.

Fear and greed are opportunities. Learning how to time purchases into fear and sell assets into greed is how you make money in any market.

Good hunting crypto traders and hopefully this advice helps you make some profitable trades!

About the Author Will Salisbury

Will Salisbury is the co-founder of Blockchain Decrypted and full-time cryptocurrency trader. He also hosts the Blockchain Decrypted podcast, and when he's not talking or writing about blockchain technology and cryptos, he likes to play games and relax in his home state of Michigan.