Understanding Bitcoin Corrections and Crashes
After languishing in the $30,000 range for months, Bitcoin finally managed to break out of the $50,000 mark by early September 2021, only to be felled by China’s crypto-ban on and their Evergrande Crisis.
The Bitcoin price hit a low of about $40,000 by 21st September, before rebounding close to 50,000 by the first week of October. It even broke its previous high and crossed $67,000 by the 20th of October 2021.
Such volatility can easily spook new investors in the crypto-industry. But what happened in the last few months are not even noteworthy price changes when you look into Bitcoin’s history of crazy price swings.
In the first quarter of 2021, Bitcoin’s price reached $65,000. Bitcoin had successfully smashed all the previous records. This was a mind-boggling 600 percent growth in just six months.
However, some tweets from Elon Musk (Tesla CEO) and China’s crackdown on bitcoin mining were all that was required to send Bitcoin tumbling all the way to below 40,000.
The China Banking Association issued a warning to all other financial institutions in the country of the risks associated with digital currency. Bitcoin lost roughly 30 percent of its value in 4 days. The drop continued and within 5 weeks it went down to $38,000 with a staggering 41 percent drop. Over the next few months, bitcoin went as low as $29,600 levels.
In terms of dollars, this was indeed the largest correction in bitcoin’s history. But was this something to be worried about?
If you check the history of bitcoin properly, this one still didn’t even merit amongst the top 10 of all time “bitcoin corrections”.
So what is “bitcoin correction”? Is it the same as the bitcoin crash? What do major bitcoin corrections in history teach us? Is it safe to invest in bitcoin during such crashes or are these warning signals that mark the end of bitcoin?
A Quick Introduction to Bitcoin Prices
The year 2008 marked the birth of bitcoin. A person or a group going by the name Satoshi Nakamoto published the first-ever white paper on bitcoin titled “ Bitcoin: A Peer to Peer Electronic Cash System”. The market then was still in the grip of the world’s worst financial low.
Bitcoin completely changed the concept of “money”. It was digital, decentralized, and completely transparent. Companies started accepting bitcoins, magazines were published on it and even TV shows like “Good Wife” acknowledged its presence. Governments started recognizing this cryptocurrency. The successive years saw successful bitcoin transactions and by 2011-2017, the trajectory was more or less upwards.
By the end of 2020, the value of bitcoin was $30,000. Bitcoin had seen meteoric highs. But then the value dropped just to jump back again in mid-April of 2021 to $65,000. It went downhill yet again. 21 st July 2021 saw the lowest price of this year, at $29,608.6.
Like any other asset, bitcoin also has its ebbs and flows. Bitcoin is highly volatile and its value tends to fluctuate. It is this characteristic of bitcoin that has been responsible for the dramatic rises and nosedives.
Two terms were used to understand this trajectory. “Bitcoin crash” and “Bitcoin correction”. They often were used interchangeably. However, in reality, they are completely different.
“In some events, crashes can foreshadow the arrival of a bear market and a prolonged period of cascading prices, whereas corrections can often be a sign of a healthy uptrend recovering to a support level before retesting a former high.”
Let us now understand what they are in detail and how they are different.
Understanding Bitcoin Corrections
“A bitcoin correction is characterized by a gradual decline in prices over the course of several days. Usually, the drop is more than 10 percent” (1).
When the Bullish traders get exhausted and need time to consolidate and recover, corrections take place. That is, when bitcoin prices surge sky high, it needs to be moderated to keep the finance afloat. The market then corrects itself before it gets exhausted.
This is usually the result of existing buyers buying the majority of the asset and there are no new buyers appearing to support the uptrend. In the case of bitcoin correction, the asset is bitcoin.
It's pretty simple. “If the sell orders continue to pile in without anyone on the other side of the order book-buying them, prices start to fall”(2). It needs to be corrected. Analysts believe that a healthy correction can lead to a proper opportunity to invest in the crypto market.
Minor events that can trigger these corrections are:
- Depleting trading volume
- Negative discrepancies between bitcoin’s price and indicators that measure its momentum like Relative Strength Index (RSI).
Historical Bitcoin Corrections
Bitcoin corrections are nothing new. Since 2013, 15 historical bitcoin price corrections have taken place.
The most notable were in 2017, with four significant bitcoin corrections.
- The first correction began on March 10 of 2017. It lasted for 15 days. It sent bitcoin’s market value down by 34 percent.
- The second correction began on June 12. It lasted for 34 days and the fall was 39.20 percent.
- The third correction was on September 2. It lasted for 13 days and the price decrease was 39.54 percent.
- The fourth one was more of a “flash crash”. It lasted for four days with a decrease of 30 percent in bitcoin’s value.
However, even with the corrections, bitcoin prices started increasing and reached the then all-time high of $19,764 on December 17, 2017.
The corrections had lasted between 13 to 34 days with the magnitude of the price correction ranging between 32.57 - 39.54%.
Therefore, “Bitcoin corrections” are like a stopgap before the prices soar upwards. In fact, economists see them as a chance to join the next long uptrend.
Now that you understand bitcoin corrections, let us talk about the “Bitcoin crash”.
Understanding Bitcoin Crashes
Bitcoin market value is mostly based on trust. Therefore, whenever bitcoin’s long-term utility is called into question the prices drop. Fundamental factors such as significant company announcements or implementation of a regulatory change in the government policy are usually the case.
One such example was when China first announced restrictions for cryptocurrencies in 2017. This depreciated the market value of bitcoin considerably. There was an instant 6 percent decline in bitcoin prices. However, despite the ban and momentary decline, cryptocurrency trading continued by switching to foreign exchanges such as Japan and Hong Kong.
Another instance was that of Elon Musk. In January 2021, it was revealed that Tesla had bought $1.5 billion worth of BTC (bitcoin). Other market giants MicroStrategy, MassMutual, One Asset River Management quickly followed suit. However, Tesla’s buy was the most significant one and accelerated the price surge.
Elon Musk also confirmed that he will take BTC payments for its products. By mid-April, bitcoin's value had reached $65,000.
Later, when Tesla disabled BTC payment considering the impact of bitcoin mining on the environment, bitcoin value plummeted. On top of that, China showcased its negative stance on bitcoin and the value dropped more. That was a massive bitcoin crash.
So what is a bitcoin crash?
A price drop in the bitcoin value of over 10 percent in a single day is defined as a bitcoin crash (3).
Historical Bitcoin Crashes
Some of the most significant “bitcoin crashes” that we have seen are:
June 2011: This was the year when bitcoin became popular as a potential game-changer in the financial world. Not many understood it completely but invested nevertheless, not wanting to miss the bandwagon. Bitcoin prices soared higher than expected and from $2 it jumped to a whopping $32.
But, Mt. Gox, which was the largest bitcoin exchange in the world by far, fell prey to hacking. Hundreds of accounts were hacked and millions of dollars worth of bitcoins were stolen. Bitcoin value fell to a penny. This was a 99 percent fall.
April 10, 2013: This is considered the biggest bitcoin crash so far in the history of bitcoin. The U.S. Financial Crimes Enforcement Network (FinCEN) announced that crypto exchanges are required to register themselves as a “money transmitter”. Bitcoin prices sank over 73.1 percent within 24 hours.
December 2017-2018: This year bitcoin peaked close to $20,000. It broke all records and to date is considered a landmark year in bitcoin history. However, on December 27 the bubble ruptured. The causes were excess supply, major hacks in countries like Korea and Japan, rumors of major countries banning it. The fall was about 84 percent.
March 12, 2020: When The World Health Organization declared Coronavirus as a global pandemic, the market price of bitcoin plummeted by 40 percent. It lost half its value in two days. What a drop it was! Within the time span of February to March, bitcoin value fell from $10,000 to below $4000.
May 2021: From its lows of $4000 in March 2020, bitcoin reached a high of $65,000/BTC by April 2021.
Then two things happened. Elon Musk tweeted about the effect of bitcoin mining on the environment. He also went back on a promise to accept bitcoin as payment for Tesla cars. The bitcoin market was still adjusting to the blow when China announced another crypto crackdown. It had banned all financial institutions and companies from cryptocurrency transactions.
This time the crash was 53 percent.
What Causes Bitcoin Crashes?
Large crashes in the crypto market are catalyzed by:
- Macroeconomic events: Like every other currency, bitcoin also is affected by a country’s economic status. Countries with volatile fiat money and high inflation are more inclined to go for an alternative asset like bitcoin that increases its demand chain. A greater demand generally results in higher prices.
- Major company announcements: Elon Musk’s company, Tesla is one such example. We won’t go into details anymore as we have already talked about it earlier.
- Sudden changes in the international regulations and policies: One such example is the recent crackdown by the Chinese regulators where they banned financial and payment institutions from cryptocurrency business. This led to the crashing of as much as 30 percent in 24 hours.
Bitcoin values like all other cryptocurrencies are a simple case of supply and demand. If demand for coins outpaces the supply chain, prices go up. All the past incidences of bitcoin crashing have occurred when its long-term utility was called into question. In doubt, the demand is temporarily muffled followed by a crash.
Another trend has been seen over these few years. Whenever there is a market surge, it is followed by halving events and bitcoin corrections.
Bitcoin Mining and Halving
Just to understand the concept of “bitcoin halving” a little better, we need to take a step back and understand how the bitcoin network operates.
- A transaction between two parties is requested and later authenticated.
- A block representing that transaction is created.
- This is then sent to each and every participating computer in the network. They are known as “nodes”.
- These nodes validate the transaction.
- This is called “Proof of Work” and the nodes receive a reward for it in the form of some cryptocurrencies. The process is called mining and miners need to solve complex mathematical problems to validate the transaction.
- The block is added to the existing blockchain. In the process, new bitcoins are created or mined. The one who solves the puzzle first is rewarded some bitcoins.
- The update is distributed across the network.
- The transaction is complete.
There are currently 9704 nodes that are running the bitcoin code.
What is Bitcoin Halving?
When the reward for mining bitcoin transactions is cut in half, the event is known as “bitcoin halving”. This is necessary to control the rate at which new bitcoins enter circulation. This sees an initial drop in the price value followed by an increase.
Initially, the reward for miners was 50 bitcoins. The current reward is 6.25 bitcoins. Halving events occurred on November 28, 2012, July 9, 2016, and May 11, 2020. Halving events are followed by a price drop and then the prices spike.
In fact, if you look into the past, some of the best years for bitcoin were 2013 and 2017 following a halfway event.
“ Bitcoin history teaches us to expect the unexpected”.
How is a Bitcoin Correction different from a Bitcoin Crash?
In the last couple of years, bitcoin has become the world’s best-performing asset. However, it is volatile and prices are vulnerable to market speculations. Often the words “crash” and “correction” have been used interchangeably. But in reality, they are very different.
1. When the price drop is over 10 percent in a single day, it is noted as a “crash”. If the same low takes place over several days, it is called a “correction”.
2. A crash always follows a sudden move and is triggered by an impact by a government, company, or country. Significant company announcements or implementation of regulatory changes can be the cause. Correction is done to correct an overvalue. Corrections are initiated by minor events such as low trading volumes and market-facing intense resistance.
FUD, FOMO, and HODLERS
The primary characteristic of the cryptocurrency is its volatility and bitcoin is not an aberration. Not only has bitcoin seen huge drops over the years, but it has also seen its share of highs.
Bitcoin has seen up to an 80 percent drop in its value as well as a 600 percent surge.
So, should we be worried when these prices swing wildly, especially to the south?
The answer is “No”.
What you need is to think long-term. Do not forget that bitcoin is just a decade old and is in its nascent stage. There are bound to be highs and lows considering its volatility. You should have a proper long-term plan that will help you reap the benefits.
As mentioned earlier, 2017 saw a series of bitcoin corrections. But the value of bitcoin was 1000% throughout 2017. Therefore, hodlers who resisted the urge to sell during the rough patches of intense volatility are now the much-envied winners.
In fact, there is a very interesting story related to this trend. It leads to the invention of the term “HODL”.
What is HODL?
On December 18, at 10.03 am, GameKyubbi posted “ I AM HODLING”. What he meant to write was “ I AM HOLDING”. The context was the fall of bitcoin value by 39 percent after a Chinese crackdown.
He continued to write that he is a bad trader and is incapable of spotting highs and lows. Therefore, according to him, the best course of action is to hold and not sell in a hurry fearing loss. He said, “ You only sell in a bear market if you are a good day trader or an illusioned noob” (4), (5).
This typo error became so famous that within an hour HODL memes started coming out. HODL is now famously used to suggest a long-term approach to cryptocurrency. It stands for “hold on for dear life”.
People who chose to hold on to their cryptocurrencies are now called hodlers. It is now an approach that has helped people counteract the two common destructive tendencies of FOMO and FUD.
FOMO is the short form of “Fear of missing out” and FUD means ‘Fear, uncertainty, and doubt. The former leads to buying high while the latter can result in selling low.
Before You Go...
Bitcoin corrections help regulate its market value. They normally follow certain events that question their long-term utility.
Normally after a massive bull run, bitcoin experiences a correction. But, as history has repeatedly proven, bitcoin always bounces back with even higher values in no time!
So what's our takeaway here? Be a HODLER with a long-term investment plan when it comes to bitcoins. Book some profits, a portion of your holdings, when markets seem to be doing really well. Use crashes and corrections as opportunities to add more bitcoins to your holding. The bitcoin trajectory is definitely skyward, all the way to the moon!
Disclaimer: This is not investment advice. Please do your own research before making any financial investments.