Bitcoin crash soon well let’s see how Crypto technical analysis and history says so
Last Saturday, Bitcoin (BTC-USD) and other cryptocurrencies experienced a sudden crash, dropping to levels not seen since October this year. Since then, the markets have recovered, but such a crash could be an ominous sign for the price development of cryptocurrency assets in the near future.
Also read: Bitcoin Cons: Some Faults with the king
Although Bitcoin and cryptocurrency have been notorious for their volatility, this crash indicates the crypto market could be heading for a more serious correction. Bitcoin and the broad stock markets usually move in a correlated manner, as I noted in a previous article. At the moment, we can see that global stock markets are down alongside cryptocurrency.
It is only a question of how deep a correction in crypto could be if it occurs. Let us take a look at some historical precedents.
The Previous corrections
Looking at the price development of Bitcoin over the last couple of years, we can see a couple of serious corrections. We’ll take a look at a logarithmic chart. Due to the exponential nature of Bitcoin price increases in the past, I believe it is best to use a logarithmic chart to analyze price changes.
Looking at the graph in the link, it becomes evident that Bitcoin has started to grow less exponentially in recent years than it did from 2011 to 2014. Back then, Bitcoin was little known, had little media coverage, and fewer people invested in it (but those who did and held until now probably made fortunes). Do Bitcoin’s bear markets and crashes have been less severe since the price of Bitcoin has started to behave less exponentially nowadays? To find out, let’s look at the major bear markets in the past.
In the past, there have been a couple of major Bitcoin crash in bear markets:
- First, a large crash occurred in the summer of 2011, possibly due to hacks and security breaches at then-active MtGox.
- Second, in late 2013, China prohibited its banks from handling Crypto transactions leading to bitcoin crash.
- Three large crashes occurred over the course of 2017 and into 2019.
If you’re looking for the 2021 crash, there have been some ‘minor’ crashes in the past, among them the one in the middle of 2013, which only lasted a couple of months, and the most recent one, the Covid-crisis, which is impressively just a minor blip on the radar of the all-time logarithmic chart.
|Previous crashes||ATH||Low at that time||% correction||Amount of time until low||When will the new high be reached|
|The summer of 2011 (MTGox)||$21.1||$2.2||-89.6%||~5.5 months||~2.5 year|
|In the middle of 2013||$164||$70||-57.3%||~3 months||~7 months|
|Late 2013 (Banking ban)||$1052||$213||-79.8%||~1 year and 10 months||~3 years and 1 month|
|End of 2017||$18,319||$3,302||-82.0%||~1 year||~3 years|
|Early 2020 (Covid)||$10,332||$5,182||-49.8%||~1 month||~6 months|
Let me explain this table in a bit more detail:
The Covid crash is different from all the others because it happened before the Bitcoin price reached an all-time high. Technically, the Covid crash can still be considered part of the 2017 crash.
On the log chart, the crash in the middle of 2013 is also distinctive, since it was relatively short and retrospectively looks more like a laugh during a long bull market (I know, I know, it’s strange to say when the price dropped by more than 57%, but it still looks like this). The price developments were swift and large, but in the grand scheme of things, this crash seems minor.
The three large crashes had an average drawdown of almost 84%, and it took almost three years on average for Bitcoin to reach a new all-time high after these crashes. Although Bitcoin and cryptocurrency prices have appreciated greatly throughout its existence, many people and institutions still view them as risky assets.
I found no evidence that recent crashes and bear markets have been less severe than past ones. Since bitcoin has behaved in a less exponential way than it has in the past, I would have expected recent bear markets to have a lower drawdown on a percentage basis.
The current scenario
Last Saturday, Bitcoin crash from an all-time high of $68,521 to a temporary low of around $42,000 before recovering. This is a drawdown of more than 38% from its previous all-time high. A drawdown of 38% may not be cause for panic when compared with some of the monstrous corrections Bitcoin experienced in the past. However, even for Bitcoin, 38% is not insignificant. Although there have been more crashes, including sudden flash crashes, this does not mean that a larger correction is needed.
Some considerations and takeaway
According to the years of the start of previous large corrections (2011, 2013, and 2017), Bitcoin is due for a new large correction and a bear market. However, there is one major difference: Bitcoin and cryptocurrency in general have become much more established and are held by many more people and institutions than during previous corrections. It remains to be seen whether this will dampen or stimulate future corrections (meaning: will people flee or hold in case of large drops).
I can see the price of Bitcoin correcting to a value of around $11,000 if this is the start of a new crypto and Bitcoin crash and bear market. From its previous all-time high, this would roughly correspond to a correction of 84%. I found no evidence that Bitcoin crash nowadays will be less severe than they were in the past, and that the average drawdown during the last three large bear markets has been 84%.
I am not predicting that this will happen. I am suggesting that investors should be mentally and financially prepared for such a drawdown. That has happened before, and it will happen again. Cryptocurrency investing is not for the faint-hearted and should only be done with money you cannot afford to lose. In addition, I recommend anyone using leverage in combination with crypto investments to be very, very careful.
A sharp correction and a long bear market seem entirely possible in the short to medium term. History has shown that a long and ugly market could result from this scenario of bitcoin crash.
However, I want to end this article on a positive note since, long term, I am bullish on bitcoin and cryptocurrencies. Having become more psychologically and financially prepared for large drawdowns than during the previous three large crashes, investors will be less inclined to sell during times of panic and despair. With this article, I hope to make investors more aware of the risks associated with investing in crypto.