Why Is Crypto Crashing?

Why is crypto crashing? Let’s investigate this matter in greater detail.

The Psychology Behind Bitcoin’s Boom and Boost Cycle

Bitcoin’s proponents see cryptocurrency as a revolutionary step forward in the evolution of finance. Its advantages over conventional currency and its increasing use cases are only two reasons why its price has skyrocketed in the past years.

For those who don’t have faith in cryptocurrency, it’s all a bunch of wishful thinking. According to these detractors, Bitcoin is an unstable, unregulated currency used by today’s cybercriminals. 

These people also believe that digital currencies undermine our efforts to build an economy that can withstand shocks, especially in light of the recent years of financial upheaval that has revealed just how wild this digital frontier really is. According to this view, the only way to prevent this fintech innovation from unleashing too much havoc on the world of finance is to effectively contain it.

It’s more than evident that both sides have strong feelings about their stances. Their exaggerations are the most convincing evidence to date that the price of Bitcoin is destined to follow the same boom-and-bust pattern observed with every potentially game-changing breakthrough in the world of economy and finance.

But what, exactly, does the boom and boost cycle signify in this context?

How Does the Boom and Boost Cycle Work

The boom-and-bust cycle, sometimes known as the business cycle, is an essential component of capitalist economies. This cycle characterizes by recurring periods of economic growth (boom) and decline (bust). 

To illustrate, central banks increase access to credit by offering low-interest loans during times of economic expansion, i.e., starting the boom cycle. Loans are readily available, and interest rates are low, making it possible for people and corporations to obtain funds at a reasonable cost to invest in cutting-edge infrastructure and financial markets, such as new tech real estate and stocks. Because of the improvement in the economy, many people see significant increases in the value of their investments. 

When there isn’t enough of something people highly demand, like housing units, the bust cycle begins. If you put too much money into something, its value will fall. As a result, capital is lost, product demand is reduced, and jobs are lost as businesses shut down. 

In this regard, recessions describe businesses’ struggles, whereas depressions describe prolonged periods of economic downturn.

The Boom Specifics

More specifically, a financial boom occurs when there is a sharp increase in the number of transactions involving a certain form of currency. This may occur for various reasons, such as a decline in the value of the currency, the introduction of a novel technological tool, an unexpected media spotlight, etc. 

Therefore, when the value of a digital coin drops, traders strive to stock up on the currency. Consequently, the exchange rate rises in response to this boost in demand for the currency, and investors reap handsome profits while the market is booming. 

The Bust Specifics

On the other hand, a financial bust occurs when a significant and rapid decrease in demand for a given currency occurs. Following the boom, the economy weakens, leading to job reductions and financial losses for investors. 

The bust of the crypto market is due, in part, to a loss of trust among investors. When a digital coin is removed from an exchange’s list, the vast majority of investors panic and typically choose to liquidate their holdings.

Finally, in circumstances where demand outstrips supply, the digital currency may experience a natural decline in value. The change will occur slowly but inevitably over time because the boom-bust pattern is self-perpetuating.

The Reason Behind the Cryptocurrency Boom in 2017

When compared to where they were a decade ago, the expansion and acceptance of cryptocurrencies are staggering. Speculative investors have gradually warmed up to the idea of witnessing over 2,000 listed cryptocurrencies. 

After the slow start, cryptocurrency prices began to rise sharply in 2017. It all started with Bitcoin (BTC), the first officially accepted decentralized digital currency, in 2009. This digital currency was built on innovative blockchain technology and designed for the purpose of performing peer-to-peer transactions that did not require the users to place their trust in an intermediary, such as a national financial institution. 

As a result, there was a huge increase in demand for all cryptocurrencies, and the value of the BTC increased significantly.

The Meteoric Rise of BTC

BTC had its value surge by over 2000% between January 1 and December 16, 2017. After starting at barely $15 billion in 2017, cryptocurrency markets are now worth $856.78 billion thanks to the BTC boom, making cryptocurrencies the fastest-growing investment vehicle in the industry.

A lot of people who didn’t know what they were getting into invested their life savings in Bitcoin after its spectacular surge. In the United States, financial authorities were tipped off by the sudden influx of inexperienced investors into this novel and highly volatile investment vehicle, while the media went to extreme lengths to keep the story alive.

Thus, the rising value of Bitcoin coincided with the increasing level of Bitcoin-related hype, creating a positive feedback loop that fueled further price increases. Bitcoin’s hype was fueled in part by the fact that some governments and financial markets have acknowledged cryptocurrency as a legal tender. The resulting frenzy drove the price of Bitcoin to astronomical levels before the coin’s price was corrected in January 2018 and led to the expansion of the crypto market.

Innovative Technology

There is a growing interest in exploring innovative approaches to conducting efficient, transparent, and accountable transactions in the aftermath of the global financial crisis, which has contributed to the prominence of cryptocurrencies.

First and foremost, cryptocurrencies are built on revolutionary blockchain technology, which threatens to upend conventional banking and the conventional monetary system. The fact that cryptocurrency transactions are far cheaper, faster, and more decentralized than those in the conventional economy is the primary factor in their successful acceptance.

Why Is Crypto Crashing?

One thing is for sure – the bust cycle brings to our attention the inherent risks of dealing with cryptocurrency. Profits can skyrocket in prosperous times. Losses might skyrocket, too, when times are bad. 

A number of factors, including hyperinflation, panic, escalating interest rates, and a lack of trust in cryptocurrency investments, are fueling the crypto bust. According to analysts, most of the causes have nothing to do with crypto markets and more to do with the economy in general. 

In the same vein, the fact that cryptocurrency has just a comparatively brief history in the realm of finance is causing some investors to experience feelings of unease regarding the asset. Despite this, the cryptocurrency market has been through a crypto winter before. The typical tendency throughout the course of time is for financial markets to go up.

When examples from the past are considered, it becomes clear that cryptocurrencies and the technology that supports them are not going away anytime soon.

Conclusion

The potent combination of bias and monetary imbalance inevitably causes booms and busts in the crypto investment markets. After all, change, growth, and societal enhancement are the promised outcomes of every new innovation. Thus, the revolutionary blockchain technology underpinning digital currencies will rarely fail to entice people looking for increased wealth and societal status.

The same consumer mentality that powered the boom, however, might potentially function in reverse if returns fall short of expectations or faith in the optimistic bubble for lucrative investments is challenged by external forces. Consequently, it might create an atmosphere of panic in the investment markets, leading to a crash. And this is the reason behind the crypto crashing.

In sum, profitable investing is all about having a good feel for the market. It is wise to purchase cryptocurrencies during its bull market (i.e., the boom) and then liquidate your holdings when the market turns bearish (i.e., the bust).