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What Causes Crypto Crashes?

Published on: May 8, 2024
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In Brief

Explore everything you need to know about crypto crashes and the catalysts behind them. We examine some of the biggest downturns in crypto history.

What Causes Crypto Crashes?

The crypto world is an exciting, innovative, and volatile space. While the potential for growth can be enticing for many, crypto crashes often leave people confused. Understanding what causes crypto crashes is crucial for anyone navigating this dynamic landscape. So in this article, we examine the history of crypto crashes, dissecting the catalysts behind some of the most significant downturns.

Note: This article should not be considered financial advice. It contains information based on historical events. We encourage you to do your own research before interacting with or holding any cryptocurrencies.

Before You Get Started

Before you explore crypto crashes in more detail, remember that Trust Wallet lets you manage and interact with 10M+ crypto assets across 100+ blockchains. You can download Trust Wallet as a mobile app, or you can install the Trust Wallet Extension for your desktop browser.



What are Crypto Crashes?

A crypto crash is a period where there is a sudden, significant decline in the price of a cryptocurrency, or the entire crypto market. These crashes often occur swiftly, wiping out significant portions of market capitalization and causing widespread panic among investors. The effects of a crypto crash extend beyond individual investors. A crypto crash often reverberates throughout the entire market and influences investor sentiment and confidence.

It's important to distinguish a crypto crash from a correction. Corrections are typically less severe and are considered healthy adjustments after periods of rapid growth. Crashes, on the other hand, are marked by sharp, abrupt declines that far exceed typical market fluctuations.

What Causes a Crypto Crash?

Unlike traditional assets with established values, cryptocurrencies are still relatively young. This can make them highly susceptible to external factors. By examining these key factors, investors can better prepare themselves to manage risk effectively. Let's explore some of the major catalysts that can send crypto prices plummeting:

Market Sentiment and Speculation

One of the main drivers of crypto crashes is market sentiment. Market sentiment can swing rapidly from excitement to fear. Speculative bubbles, fueled by hype and optimism, often precede crashes, leading to unsustainable price growth that eventually collapses under the weight of reality. When market sentiment shifts, investors may panic sell, exacerbating the downward spiral and triggering a cascade of selling pressure.

Regulatory Changes

The regulatory landscape surrounding cryptocurrency is constantly evolving. Regulatory uncertainty and government interventions can significantly affect the cryptocurrency market. News of stricter trading regulations or bans can trigger panic selling and significant price drops. Similarly, government actions such as bans or restrictions on cryptocurrencies, can create uncertainty and undermine investor confidence, contributing to market downturns.

Security Breaches and Hacks

Major security breaches or hacks on crypto exchanges or crypto wallets can be devastating. High-profile hacks of exchanges or blockchain networks can shake investor confidence and trigger panic selling. Security incidents can result in immediate price declines and have long-lasting repercussions, eroding trust in the underlying technology and deterring future investment.

Examining Historic Crypto Crashes

Examining some of the biggest downturns in crypto history gives us valuable insights into the catalysts and dynamics behind these significant market crashes. While each crash may have unique triggers, they often share common themes. Here are a few notable examples:

The Mt. Gox Collapse (2014)

The collapse of Mt. Gox, once the largest Bitcoin exchange in the world, sent shockwaves through the cryptocurrency community in 2014. Mt. Gox filed for bankruptcy after revealing that it had lost approximately 850,000 Bitcoin, worth over $450 million at the time, as a result of hacking incidents and security breaches. These led to significant losses for Mt. Gox users, and undermined trust in the security and reliability of cryptocurrency exchanges. The fallout from the Mt. Gox collapse contributed to a prolonged bear market in cryptocurrencies, and served as a sobering reminder of the risks inherent in the ecosystem.

The 2018 Bitcoin Crash

One of the most significant downturns in crypto history occurred in 2018, following the meteoric rise of Bitcoin and other cryptocurrencies in 2017. Nicknamed the "Great Crypto Crash," this downturn saw Bitcoin crash by a staggering 65%. The crash was characterized by a rapid, steep decline in prices across the board, wiping out billions of Dollars in market capitalization. The initial coin offering (ICO) craze of 2017, rife with scams and unsustainable projects, had burst, leading to a loss of investor confidence.

A further combination of factors also contributed to the crash, including regulatory crackdowns in major markets such as China and South Korea, concerns over the scalability and usability of cryptocurrencies.

The 2022 Crypto Crash

The 2022 crypto crash wasn’t a singular event, but a perfect storm of factors that triggered a market-wide sell-off. Global economic slowdown, with rising interest rates and recession fears, and the fall of crypto exchange FTX dampened investor appetite for crypto. The TerraUSD (UST) collapse in May 2022 significantly affected sentiment, as the algorithmic stablecoin lost its peg to the US dollar, causing panic and a domino effect that dragged down other cryptocurrencies. Increased government scrutiny and potential regulations added to the uncertainty.

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Closing Thoughts

Despite efforts to predict and mitigate the effects of crashes, the cryptocurrency market remains inherently volatile, susceptible to external factors such as regulatory changes, security breaches, and macroeconomic events. Investors must exercise caution and employ risk management strategies to navigate the unpredictable terrain of crypto investments effectively.

Before interacting with any cryptocurrency or blockchain project, we encourage everyone to do comprehensive research to understand the underlying technology, market dynamics, and regulatory environment. This includes evaluating the credibility and track record of project teams, assessing the potential risks and rewards, and staying informed about market developments and emerging trends.


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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.

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