Home Finance What Can Cause a Bitcoin Crash? How to Stay Safe

What Can Cause a Bitcoin Crash? How to Stay Safe

Bitcoin Crash

Since Bitcoin (BTC) was launched in 2009 by Satoshi Nakamoto, it has been the best-performing cryptocurrency for more than a decade. The coin reached an average annual return of 1,576% between 2010 and 2022. As a result, it has occupied a pole position for investors as far as the crypto market is concerned.

The crypto market, however, has witnessed a dramatic crash in the past, with the BTC price leaving investors worried about its sustainability. Can it happen again, and how can an investor stay safe? Today, we’ll look at factors that were responsible for previous price declines and use them to stay ahead.

Increased Interest Rates

One of the biggest enemies of a country’s economy is inflation. Governments and their central banks tend to increase interest rates as a monetary policy measure of reducing the money supply. These high interest rates however dictate BTC performance as investors have less money to buy Bitcoin.

Despite this, as an investor, you can capitalize on day trading where you buy and sell in short timeframes. This enables you to capitalize on small profit margins which when compounded bring high returns. Day trading also offers a wide variety of assets to trade at a low cost.

Regulatory Uncertainties

Governments around the world have developed an interest in BTC and therefore increased their scrutiny of the same. Despite this, Bitcoin still lacks a clear regulatory framework. Some countries have restricted BTC trading through taxes while others have not interfered, and such things can influence investor sentiment.

It’s good to monitor how various influential governments are treating Bitcoin and other cryptos. This way, you can anticipate what is going to happen. However, it’s good to note that regulation is not necessarily a bad thing.  It can be good for all players involved as it can help establish transparency and prevent fraud. It can also open up the market to institutional investors, thus improving on market liquidity.

Liquidity Concerns

Liquidity in the cryptocurrency market highly influences price movements. When liquidity is high, the demand for BTC is high and as a result, prices are stable and less volatile. Traders can also be able to convert Bitcoin to cash without affecting its price. However, when liquidity plummets the market experiences larger price swings. The best thing to do as a trader is to increase the frequency of trading and volume of trading as it enhances liquidity thus stabilizing the market. Therefore, one needs to identify trading volume before they trade as this communicates the liquidity levels in the market.

The Fall of a Crypto Exchange

FTX was a major crypto exchange, and it crashed in 2022 together with Bankman-Fried. This was after customers withdrew from the exchange resulting in its ultimate bankruptcy. It affected the entire cryptocurrency market and BTC being a major player in the market is not an exception. Many traders incurred losses on their investment and this is a lesson to investors today. You cannot make a fortune in a day, leverage is key, and it is important to invest what you are capable of losing. On top of that, diversify always.

Technical Factors

Investors use technical analysis to guide their trading patterns in Bitcoin trading. Technical analysis tools include charts, patterns, indicators, and moving averages. When these patterns are breached, if the indicator is directing a buying decision for example, many traders in the market can exercise the trade. Technical analysis helps one understand market sentiment and possess the ability to generate consistent returns. It is vital for one to have a better understanding of these crypto charts and digital data available in order to correctly predict the market trend.