How Bitcoin Caused Crypto Prices to Crash

Crypto prices across the board crashed today (Wednesday), with most plunging more than 30% in less than 24 hours.

At one point, the Bitcoin (BTC) price fell to just over $30,000, a decline of 53.7% from the all-time high of $64,800 it reached in April.

The massive drop came on top of more than a week of declines. Bitcoin fell about 25% in the week prior to today's drop.

Because crypto prices generally follow Bitcoin's lead, the sudden sell-off in Bitcoin also triggered a more widespread crash in the cryptocurrency markets.

While the price of Bitcoin did rebound slightly by mid-day, it was still trading in the upper $30,000s - well below where it was just a couple of days ago.

Of course, investors want to know why this happened.

Several factors combined to cause prices to start falling and then accelerate into a full-blown crash...

Why Crypto Prices Plummeted Today

The trouble started about a week ago, when Tesla Inc. (NASDAQ: TSLA) CEO Elon Musk tweeted that the electric carmaker would no longer accept Bitcoin as payment for vehicles.

Although Musk specifically said that Tesla had no intention to sell the Bitcoin it holds on its balance sheet, many saw the tweet as evidence that Musk had soured on the No. 1 cryptocurrency. The price of Bitcoin promptly fell 17%, dragging many cryptocurrencies lower along with it.

The Musk tweet already had the cryptocurrency markets on edge.

Then China weighed in.

On Tuesday, several Chinese agencies reiterated years-old policies that banned cryptocurrency several services. The policies prohibit financial and payment entities from providing any crypto-related transaction services and ban initial coin offerings (ICOs).

Crypto-focused news sites such as CoinDesk and CoinTelegraph correctly reported the announcement from China as a confirmation of existing policies from actions take in 2013 and 2017.

But mainstream news outlets reported the announcement as a fresh "crackdown" or "ban" by the Chinese government. Some sample headlines:

"China bans financial, payment institutions from cryptocurrency business" (Reuters)

"Bitcoin's obstacles mount amid China cryptocurrency warning" (Bloomberg)

"China cracks down on crypto business, saying 'speculative' trading 'seriously infringing' on financial order" (Forbes)

It's no surprise people would sell after seeing those headlines. That they were inaccurate soon became irrelevant. Panic set in, and the stampede to the exits was on.

The drop was further fueled by heavily leveraged traders getting liquidated as the Bitcoin price fell. According to CoinTelegraph, $6.5 billion worth of Bitcoin positions was liquidated in just 24 hours.

That leaves us with one question: What now?

How Investors Should Trade Crypto Now

Though some crypto investors - especially new ones - are throwing in the towel now, that strategy will only succeed in locking in losses. As they say on crypto Twitter, now is the time to have "diamond hands" not "paper hands."

Investors new to cryptocurrency may not realize that crashes are not all that unusual. Drops of 30%, 50% and even 80% have happened several times in the brief decade that crypto has existed. Each time, crypto prices have bounced back to levels many times higher than where they were before the crash.

Also important to note is that the investment cases for Bitcoin and several other top cryptocurrencies such as Ethereum (ETH), Cardano (ADA), and Chainlink (LINK) haven't changed. The prices of these cryptos will rebound in the months ahead. It's very likely they will reach new all-time highs before the end of the year.

For those who don't own any crypto but wished they had bought some when prices were lower - well, now's your chance. Everything is 30% to 50% off, for a limited time only.

You never know how fast the rebound will be. It may take months for crypto prices to get back to previous levels. Or it could happen next week. If you really want exposure to crypto, this downturn is a terrific opportunity.

Just don't go overboard. Remember, cryptocurrency investing is riskier than stock investing. Only put in what you can comfortably afford to lose.

Put These Tiny Cryptos on Your Radar NOW

A surge of interest from institutional investors is setting the stage for a rally in a slew of small digital coins.

But understand this: These under-the-radar players are much more affordable than Bitcoin.

Some are so hot, even a small stake could transform into a humble fortune in 2021.

One is trading for around $12 - and could deliver a 638% profit by the end of this year.

Our resident Silicon Valley insider is recommending three tiny coins as today's BEST crypto buys - to get his take on all three, click here.

Follow me on Twitter @DavidGZeiler and Money Morning on Twitter and Facebook.

David Zeiler

About the Author

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David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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