Except for stable coins, which are tied to a stable asset like the US dollar, cryptocurrencies are often volatile investments.
Many investors may be scared off by the price fluctuations because they can’t stand the volatility, and when a cryptocurrency’s price falls, they panic sell too soon, only to see it rise 10 times from its lows.
We examine numerous reasons why crypto asset values may decline in this post, as well as how you, as an investor, might respond.
In a free market, the price of an asset reflects the collective opinion of all investors, buyers and sellers. However, in cryptocurrency markets where there are less regulation and exchanges are not as regulated as other financial markets like forex or stock market, it is easy for market players to manipulate prices of an asset by spreading false information about it.
This can cause the price of a cryptocurrency to fall sharply. For example, in January 2018, a false news report that South Korea banned all crypto trading caused the price of Bitcoin to plunge by 10% within hours. Imagine if you had sold your Bitcoins then.
The government has been debating whether cryptocurrencies should be banned or regulated for a long time now and this has caused investors to be worried about the future of their assets. In countries where cryptocurrencies have been banned like China and India , prices have plunged due to this uncertainty over their future regulation .
In countries where they have been regulated such as Japan , they have surged because investors believe that regulation is a positive step towards mass adoption . Therefore, uncertainty over government regulation can cause prices to fall.
Technical Analysis Failure / Overbought / Oversold Markets
Technical analysis is used by many traders in traditional financial markets to predict price movements based on past data like trends, volumes and other indicators which might be lagging but still useful for predicting future trends (see our guide on how to use technical analysis).
It is based on the assumption that past trends will continue into the future. However, technical analysis is not always accurate and sometimes it fails. When this happens, technical traders exit their positions to reduce their losses, which causes prices to fall.
The other reason why prices of cryptocurrencies can fall is because of overbought or oversold markets. In a market that has been in an uptrend for a long time, there are many buyers who buy at higher levels and they are called “longs”.
At some point, if prices rise too high and the market has no sellers (the amount of shorts is low), then the market becomes overbought. That means that there are more buyers than sellers and therefore supply may not be enough to meet demand at current levels.
A similar scenario happens when the price falls for a long time and there are many sellers who sell at lower levels . At some point, if prices fall too low and the market has no buyers (the amount of longs is low), then the market becomes oversold . That means that there are more sellers than buyers and therefore demand may not be enough to meet supply at current levels.
When an asset moves from overbought to oversold or vice versa, it might see a big move in either direction because investors react fast to either extreme by selling or buying aggressively until their positions become balanced again (see our guide on how to use MACD indicator).
In crypto markets with less liquidity, such price changes can be more dramatic because the price may move a lot and this could cause investors to sell more aggressively, causing prices to fall.
FUD (Fear, Uncertainty and Doubt)
FUD is a term used in traditional financial markets to describe negative news about an asset or company that might cause investors to sell their assets. This leads to a downwards trend in prices because many people are selling at the same time. The opposite of FUD is HODL which means buy and hold (see our guide on how to use HODL).
In the crypto market, news related to regulation, hacking or scams can cause panic among investors and they will sell their assets in fear of losing money. An example of this would be when China banned ICOs in 2017 or when MtGox was hacked in 2014 where around 850,000 bitcoins were stolen.
Media Coverage / Hashrate Growth / Altcoin Pumping / Hard Forks
These are all examples of positive news that might cause investors to buy a certain asset. In the crypto market, it can be difficult to determine whether these news will cause a bull run or not because there is no regulation and the news can be manipulated by bad actors.
If prices are rising and media coverage is positive, then this could be a sign that the market will continue to rise. However, if they start rising too much, then this could indicate that the price has gone too far and there may not be enough demand for the amount of supply at current levels (see our guide on how to use MACD indicator).
If prices are falling but hashrate growth is positive, then this could mean that miners have found new blocks which adds more demand for an asset. However, if they start falling too much and hashrate growth stops increasing, then this could mean that miners have found new blocks but there is not enough demand for the amount of supply at current levels (see our guide on how to use MACD indicator).
When a coin has seen a pump in its price by getting listed on exchanges or hard forks or when altcoin pumping occurs (this usually happens when an altcoin experiences a pump because it gets listed on an exchange), then it may indicate that demand has increased because more people want to buy into it.
However, if prices start rising too much after such pumping’s, this may indicate that there are more buyers than sellers which might cause prices to drop because there are not enough buyers.
Technical Analysis / Support and Resistance Levels / Fibonacci Retracement Levels
Technical analysis is a way to determine where prices will go in the future by analyzing historical data and using it to forecast the future. The data used is usually found on a chart or in an analysis of historical data.
Technical analysts use this information to predict where prices will go next based on previous price movements and what they believe will happen next.
Support levels are areas that are expected to stop falling in price from an asset’s current level (see our guide on how to use support & resistance levels). Resistance levels are areas that are expected to stop rising in price from an asset’s current level (see our guide on how to use support & resistance levels).
Since technical analysis is used for prediction, it should be noted that there is no guarantee that technical analysis will work as predicted so you should always do your own research before investing based on technical analysis alone. It can also be difficult to determine which assets have strong technicals because many assets do not have enough information available for traders to analyze them.
This can cause people who have little knowledge of trading or analysis of markets, but who have time and interest, to buy into some assets without any knowledge of them which might cause them a loss if they decide later that their investments were not good ideas or if they just didn’t know what they were doing Also, technical analysis is not a way to make money, it is a tool for predicting where prices will go next.
Resistance levels are areas that are expected to stop rising in price from an asset’s current level (see our guide on how to use support & resistance levels). Support levels are areas that are expected to stop falling in price from an asset’s current level (see our guide on how to use support & resistance levels).
Team and early investors sell
“Buy The Dip” is a term that refers to buying an asset that has fallen in price after it has reached an important level of support or resistance (also known as “The Resistance Line”). A common example of this is gold which when it gets too low and falls below the 200 day moving average, there is then a large influx of people who buy gold because they expect it to rise again.
This is called “The Resistance Line” because it was previously broken by the large influx of people who bought gold when it was below this level.
When the price rises back above this level, there is then more selling than buying and the price falls back below where it was before which causes more people to buy because they think it will continue rising again.
This can be used as an indicator for future prices in many markets like stocks, bonds, real estate and commodities.
This can also be seen in other markets like oil where when oil gets too low (below $60) there are always those who expect oil prices to rise so they begin selling their oil positions since they don’t expect them to rise any further than they have already risen (they think that oil prices are going up).
When oil does rise back above $60, there are then more buyers than sellers so that the price rises even higher and this causes the first group of people who sold oil to buy back into the market and take profits.
This can also be seen in other markets like gold and silver where when gold or silver gets too low (below $1,000) there are always those who expect gold or silver prices to rise so they begin selling their gold or silver positions since they don’t expect them to rise any further than they have already risen (they think that gold or silver prices are going down).
When gold or silver does rise back above $1,000, there are then more buyers than sellers so that the price rises even higher and this causes the first group of people who sold gold or silver to buy back into the market and take profits.
This is a very simple way of thinking about the “Sell The Dip” strategy and it can be used in many different markets. For example, if you are selling stocks, bonds or real estate, you would expect the price to fall after it has reached an important level of support or resistance and then rise again when it breaks through this level.
If you want to be more specific, you could look at the MACD histogram on stock charts or bond charts and see if there are any patterns in where the price has broken through important levels of support or resistance. This can give you a clue as to what kind of market you’re dealing with.
The same goes for commodities like oil, gold and silver. If a commodity is breaking through an important level of support or resistance then there will usually be a large influx of people who buy that commodity because they expect it to rise again (sellers).
When the price rises back above this level, there are then more buyers than sellers so that the price rises even higher. This causes people who sold commodities to buy back into these markets and take profits (buyers).