Why Is Bitcoin Crashing? Wait… Why Is Bitcoin Pumping?

It’s been quite the week for Bitcoin. On March 6th, the selloff began gradually, culminating in a massive drop from above $8000 all the way below $4000. Following that local low, we experienced a bounce of nearly $1600, to $5600, in just 30 minutes. Suffice it to say, if you weathered yesterday’s storm and you’re still here (perhaps with a few more grey hairs), you’ve earned your OG stripes.

So what’s the deal? Why did Bitcoin (and apparently the entire cryptocurrency ecosystem) sell off? While it’s impossible to definitively point to any one answer, here are a few likely contributing factors:

Everyone Is Selling Everything

Coronavirus fears have caused a mass panic in global markets. President Trump has restricted travel from Europe to the US, Italy is essentially shut down, and many other countries are beginning to follow suit. World leaders and their families are beginning to self-quarantine as they’ve come into contact with others confirmed to be affected, and large gatherings of people are being cancelled and/or banned – as with the NBA and NHL seasons.

Naturally, directly affected industries like the travel industry have been hit the worst, but the Dow Jones, S&P, Nasdaq, etc have all shed incredible amounts, thrusting them into bear markets. Essentially, if it can be sold, people are selling it.

Even “Safe Havens” Have Experienced Sell-Offs

In the financial crisis of 2008, even gold experienced a significant downside before rallying to all time highs in 2011. The idea that a safe haven asset would sell off in the midst of an equities crunch sounds counterintuitive to many, but there’s actually a logical reason for this.

Many investors become overleveraged throughout bull markets, and when massive downside comes, they are in need of capital. With equities tanking and margin calls blowing up the phone, a lot of market participants need liquidity to cover their positions. If their only other stable source of liquidity is sitting in something like gold (or Bitcoin), they will need to sell to cash. Gold experienced a drop from over $1000 to below $700 in the great recession, only to soar above $1700 just two years later. It should come as no surprise to anyone that despite its sound monetary policy, Bitcoin would experience a similar selloff at the start of a potential global financial crisis.

Leverage – The Great Equalizer

First off, I want to say I’m all for free markets. Watching Bitcoin plummet and bounce yesterday (and through the years) with no circuit breaker to shut down traders was invigorating. When someone babysits you and every financial move you make, hard lessons are never learned and many lose (or never gain) the ability to properly gauge risk.

With that said, the lessons learned using leverage can indeed be tough ones. Putting all your eggs in one basket in an unpredictable market like Bitcoin can go one of two ways, and half of that bet results in significant financial losses. Some exchanges saw over $1.4 Billion in liquidations in a single day – the largest ever, by far. Basically a lot of people were betting that Bitcoin would go up, using a lot of other people’s money. They were wrong and, because of that, forced to sell their coins at exceedingly low prices.

So What’s the Lesson Here?

My biggest takeaway from all this is that Bitcoin takes no prisoners, and that is a beautiful thing. In a world where every aspect of our lives is presided over by big brother telling us what to do, where to go, and how to use our money, we get to witness a bit of free market capitalism. People are allowed to do as they please with their money, whether it be hodling, trying their hand at TA, or just flat out rolling the dice. Does it sting a little sometimes? Absolutely. Do we learn and grow from it? You bet your ass. I wouldn’t have it any other way.

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