Why Did Bitcoin Crash??

Why did Bitcoin Crash in the first place?

Many people think that Bitcoin’s crash was about Elon or China – it was about INFLATION.

This is because  :

Cypto is extremely volatile  Uncorrelated assets go in both directions

Crypto has idiosyncratic risks

This is nothing new 

There are plenty of proximate reasons. China cracked down on bitcoin. Elon Musk said a nasty thing about bitcoin. The Federal Reserve got a bit excitable about the digital dollar again.

Crypto is extremely volatile

The daily price volatility for Bitcoin over the past three years is 75%. In comparison, the S&P 500 daily volatility over the past three years has been 22%. So Bitcoin has been roughly four times as volatile as the stock market.

But these numbers likely underestimate the actual volatility of Bitcoin considering crypto trades 24 hours a day, seven days a week. It’s much harder to sleep well at night as an investor when markets are always open, and potentially crashing.For the uninitiated, this type of volatility can tempt you to trade more than you’re comfortable with because prices are constantly rising or falling much faster than they do on the stock market. The higher the market volatility, the higher the behavioral volatility.

This is nothing new

Losses are nothing new to longtime crypto investors. Bitcoin fell more than 80% from 2013 to 2015 and again from 2017 to 2018. This is now the 10th time since 2017 that Bitcoin has fallen 30% or more from an all-time high. In that same time, the U.S. stock market has fallen 30% or more just once.

Despite these losses, Bitcoin is up 30x since the start of 2017.

Making money in any risk asset is not always easy. You must be willing to accept large losses occasionally over the short term to earn higher returns over the long term.

This is more true in crypto than in any other asset class. If you can’t handle wild price swings, crashes at all hours of the day, and bone-crushing volatility on occasion, you don’t have what it takes to invest in this asset class.

The thing is though, if you look at the bitcoin price, it peaked in mid-April, at just under $65,000. It then drifted somewhat (I say “drifted”, but only by bitcoin standards – it fell below $50,000 at one point before the end of April, before rallying).

It then took a proper knock on the head on 12 May. It slid from just under $60,000 to just under $50,000 in a single day. What else happened on 12 May? That’s when US inflation came in way above expectations, and markets suddenly started to take it all seriously.

So to my mind at least, there’s a pretty clear link there. Bitcoin has crashed because investors are worried about inflation. And why are they worried about inflation? The main fear is that central banks – and the US central bank in particular – will pull out all the lovely liquidity that it’s been pumping into markets.

The risk then is that an asset like bitcoin – which thrives on the money-printing/debasement narrative, but also in an environment in which everyone is enamoured with tech – becomes a lot less appealing.

Conclusion

Bitcoin rise/fall is all about inflation( caused by supply and demand) historically, after every halving, bitcoin experiences a bull run.   Its current inflation rate is 1.76%. This means the value of bitcoin goes up after every halving.