Why Did Bitcoin Crash? A Detailed Analysis

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Bitcoin rallied from $3,000 in March 2020 to $65,000 in April 2021. The crypto market was seeming too good to be true lately. Everybody I talked to seemed to either already be making money from it or looking to get in. In hindsight, this seemed like a perfect local“top” indicator for the bitcoin crash was near!

Even if one forgets the absurdity of Dogecoin, people were buying and making money from stupid meme knock-offs coins that similarly had dogs in their logos or obscene pornographic names. This absurdity still largely exists in the market. Memecoins (which I’m surprised is even a category now) like Shiba Inu and Safemoon are both top 100 projects in terms of market capitalisation as I write this article on the 21st of May 2021. If this is not a top signal, I don’t know what is. But instead of complaining about the shitcoinery that is going on, I would like to uncover why after the bitcoin crash, the party either ended or is paused for a while. I have three hypotheses for this:

Hypothesis 1 for the Bitcoin Crash: This was just a “normal” correction

Bitcoin is amazing. It is permission-less, unconfiscatable, deflationary, nondiscriminatory, digital, global, fungible, easy to use and decentralized. You know it, I know it. But the one downside I see with Bitcoin as an asset is that it is new. The benefit of this is that investing now would ensure that you are one of the early adopters and gain a lot of profits. But because Bitcoin is so new this means that we do not have a lot of historical data to compare it with.

The charts match up very closely. This may very well be the case. Even though I am not fully convinced that this is the case, out of all the possible scenarios, this is the one I am the most hopeful for. Why? Because this one hypothesizes quite clearly that the bull market is still intact and we have at least 3–6 more months of profits to come! But let’s not confuse what we wish for and what is most likely to happen.

Hypothesis 2 for the Bitcoin Crash: This is the End!

Bitcoin crash has happened! This is the end! Sell everything! Get out! See you again after 4 years!

Oh man, this is the worst one. As much as I hate to admit it, the signs that we hit the top of the cycle are all around us. In fact there are so many, that let me list them for you:

1.The shitcoinery that I talked about in the introduction section of this article. Memecoins with strange names and logos are doing well.

2. Everyone seems to be making money. This may sound mean, but I know people who haven’t really developed the correct temperament for trading/investing and are still making good profits with questionable decisions.

3. NUPL; The Net Unrealized Profit/Loss chart tells us on which cycle of the market we are on. Let us look at the NUPL chart for the history of Bitcoin:

The Blue area in the chart signifies that 75%+ of the people in bitcoin are in profit. Green area that 50–75% are in profit. Yellow that 25–50% are in profit. Orange that 0–25% are in profit. And the Red area signifies percentage in a loss. After observing the NUPL chart, we see that we are in red and orange mostly through the bear market. We are in yellow either when we are transitioning from the bear to bull market or vice versa.

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We are in the green market during most of previous bull markets and briefly reach the blue area when the we reach the cycle top. Even though we did not reach the blue area this year we got very close to it and have now started fall below the green area and to crack the yellow area. As previously mentioned, the yellow area signifies a transition from a bull to a bear market.

4. We are below the 200 day moving average. The 200 day moving average is the average price of Bitcoin if you take into account the past 200 days. Obviously this number changes as days pass on, hence it is called the moving average. Below are charts of the bitcoin price with green and red candles. The yellow line in the chart represents the 200 day moving average. Let us first look at the 2013 bull market:

The 2013 bull run may not be the best example but we do see here that after the bull run which resulted in Bitcoin going from $100 to $1,200, once it crossed below the yellow line which is the 200 day moving average, it largely stayed below it for a long time and was ensued by 2 year bear market until finally the 2016–2017 rally started.

Let’s now look at the 2017 bull market:

We see the same patter for the 2017 bull run. For both 2016 and 2017 Bitcoin stayed above the 200 day moving average and kept going up until it finally crashed below it and then struggled to get above it. Until in late 2019 it broke the pattern and started to go up again. Which brings us to today:

After recovering from the 2020 March COVID crash, we can see that once bitcoin reaches above the 200 day moving average it stays above it and continues to climb in price until very recently. We have recently ventured below this line and if we follow a similar trend to the previous two cycles then this means that we are going to be met with a two year bear cycle.

Hypothesis 3 for the Bitcoin Crash: Something smells fishy

This is the hypothesis I agree with the most. I’m risking seeming like a tinfoil cap wearing flat-earther here because what I will share with you is a conspiracy theory. But I ask that you don’t dismiss me just yet.

Here’s what I believe there was — “Market manipulation”. Before you say that this is not possible let me attract your attention towards last year when JPMorgan was caught manipulating the silver market. Silver’s market size/market capitalization is approximately $1.5 trillion. Bitcoin’s all time high market capitalization was at $1.2 trillion and is currently at $0.7 trillion. If JPMorgan was able to manipulate a bigger market, do you not think that another such a large entity or group of entities would not be able to manipulate. Once you are open to this possibility let me share some information with you.

Richard Wyckoff, born in 1873 was a 20th Century pioneer in Technical Chart Analysis. Nearly 100 years ago he noticed that big players in the stock market that had enough money to “move” the market, were buying and selling in a certain manner so that they can buy low and off-load/sell as much of their stock as possible. He was infuriated by this so he made sure he would document this. This is what he came up with:

Before starting Phase A, the large players ensure that they buy a huge amount of stocks. Then they commence Phase A with:

PSY (preliminary supply): this is the point where large players begin to sell off their shares in quantity but not enough to cause a downturn.

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BC (buying climax): this is when the asset is doing well, possibly there is some good news that coincides with this. Large players take this opportunity to dump a huge amount of their shares.

AR (Automatic Reaction): the huge sell-off causes a panic downturn until we find a point of support marked as AR on the chart.

ST (Secondary Test): once price starts to go back up the ensure that they sell before the previous high creating a lower high.

SOW (Sign of Weakness): the sell-off creates a lower low this time showing that the previous low had been taken out. Since ST was also a lower high, the market sentiment is now bearish. At this point, they can buy up cheap since people are seeing weakness in the market and are likely to sell off their shares.

UT (Upper Thrust): the sudden buying up of shares by the large players causes a thrust upwards. Here they are able to sell-off another large portion of their previously bought shares. But since we have created a higher high, the sentiment in the market is now bullish.

UTAD (Upthrust after Distribution), LPSY (Last Point of Supply): Since they have now created a fake sign of strength in the market, the smaller players are quick to buy any lows driving the price up. This gives the large players opportunities to offload their last few shares. Since they know that they are going to dump a large number of shares, at this point big players can choose to also “Short” the stock before dumping their stock in the market, increasing their profits even further.

Now let me ask you do you see any similarities here with the recent price of Bitcoin. This is the bitcoin crash in daily chart from Feb 2021 to May 2021:

In case you don’t see it, let me draw it out for you:

And now if we zoom out, I circled the area in the chart where I believe the large players had a long time to accumulate a lot of Bitcoin:

I know that the Wyckoff Distribution pattern does not match exactly on the bitcoin crash chart but I personally believe that it describes the recent price change quite closely. Of course no pattern will repeat exactly. But for something that this Wyckoff dude created 100 years ago, the similarities look uncanny! I cannot take the credit for finding this similarity. I got it from the following YouTube video:

Now let me take my tinfoil hat off. I would like to corroborate this conspiracy claim with some more data. I believe that the easiest way to do this is to also check what the large players in the cryptocurrency market did during this time. Luckily in the world of cryptocurrency, everything is transparent and verifiable in the blockchain. These large players are colloquially called “Whales” in crypto.

The Whales Bought!

Large amounts of cryptocurrency continued to be moved off exchanges into private wallets during the bitcoin crash. This signifies that they most likely bought cryptocurrency on that exchange and then moved it into their private wallet for long term holding.

But could it be that these are different whales than the ones who sold the top? Apparently not:

To me, this is sufficient evidence to prove that these recent movements were caused by Whales/large players to be able to sell off huge amounts of their cryptocurrency holdings at good prices only to be able to buy again when things have crashed down.

Whats next?

Nobody can tell the future but it seems that large players are HODLing. Long term believers are also HODLing and so am I. I think generally in the world of Bitcoin, if you play the long term game, you make money. Even if you bought the peak at $20,000 back in the 2017 bull run, you would be in profits now if you were just able to hold throughout the bear market and not sell. That’s why in crypto we have this saying: when in doubt, zoom out.

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Just like everyone else, I do not have a crystal ball. But since you clicked on this article and I have provided you with 3 hypotheses I feel a certain responsibility to also share with you what I believe so you are not left more confused than you were before clicking here 😂. In my personal opinion, it seems that all the weak players in the cryptocurrency investment space who joined in the last 3–4 months hoping to make a quick buck have been shaken out.

Now, I think we will have a medium/long pause in the bull market perhaps lasting from 1–4 months, after which the bull market will continue. I believe that this pause will give us a huge opportunity to accumulate more Bitcoin and to be ready for the next push upwards. Of course, I am not a financial advisor and I am simply sharing with you what I will do. You do you.

What has this “bitcoin crash” taught us?

Personally, it has taught me to always keep some cash on the side to buy such dips. I really wanted to buy Bitcoin when it had reached $29k briefly but I couldn’t because I had already invested all my cash and had to keep some in my bank account you know for luxuries like food, rent etc.

It has also taught me to think long term because Bitcoin is amazing. You don’t need a government or bank’s permission to transfer/transact with it. It is completely permission-less. You don’t need to be of a certain race, nationality, gender, economic class or have a certain credit score to participate. It is nondiscriminatory. Governments can’t inflate it by printing more notes. It is deflationary (people die with it or lose it). Governments can’t confiscate it from you like the US Government did with gold in 1934. It is unconfiscatable. You can transfer small and large amounts of it anywhere you have internet. It is global, digital and fungible. You can not stop it. If you kill all the miners in Timbuktu, Bitcoiners will survive in Zanzibar. It is unstoppable. Bitcoin may crash and reach lows for 3–4 years like it did in 2013 or 2017 but it always goes up eventually so the best thing to do is to just not panic sell and regain composure before making any buying or selling moves.

This was a guest post by Angad Singh, catch him on twitter

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