A Deep Dive into BTC’s Famous Dips
Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.
- Graphic by Jason Lajara
Bitcoin and the overall crypto market have taken some incredibly strong dips since its inception. With dips as large as 50%+ it can be an intense asset class to trade actively and passively. These dips can be caused by a variety of both technical and fundamental triggers. We hope that by attempting to take a deeper dive into the nuances that create and/or trigger these dips, we can more appropriately react to them as an industry when they do occur.
The first dip we’re going to take a look at is a little harder to track because BTC wasn’t nearly as known nor as accessible as it is today. The dip that took place between June 8th and June 12th of 2011 was one of the first major corrections seen in Bitcoin’s tenure. This saw a price decline of about 68% in a few days. This drop triggered a bear market that wouldn’t see those peaks again until 2013, however not until dipping further to $2 from its $30+ peak. For example, the exchange MtGox even hit $0.02 at its lowest point.
So what, if anything, directly triggered this dip?
At this point of crypto history, there were often large gaps between prices on exchanges, so the prices often varied in regards to how extreme the swings would be. This crash is believed to have been caused by the hacking of MtGox and the subsequent announcement of such. This was followed by a strong sell-side pressure around $17.50 which then took a massive dive down to $0.02. Between the period of 2011 to 2013, MtGox would record over $60 million in losses and approximately 837k BTC that was either lost or stolen. To put that in perspective to today, that amount of BTC today would be worth about $35,154,000,000.
After this, most of the largest dips would be based on the halving cycles. The halving occurs approximately every four years, and we’ve had three halvings so far. The BTC halving event halves the reward that miners receive per block mined. This means, over time, mining will award less and less BTC until all 21 million BTC have been mined.
The first halving occurred on November 12th, 2012. At the time, the community didn’t have today’s understanding of the importance of BTC halving events and their effects on price action.
After each BTC halving event, there would usually be a new all-time high reached. After this new all-time high would be reached a bear market would usually follow. Since the halving is every four years a new all-time high is achieved every four years or so followed by a bear market. This has become known as the BTC halving cycle.
In 2013, a new all-time high was reached for BTC at the beginning of the year. After that, two large-scale dips occurred in 2013 before the first halving cycle’s peak was reached at the end of the year of over $1,000. The first dip was in April due to yet another MtGox hack. In this one, hackers exploited a crash that occurred due to an overload in volume. This triggered an 86% drop in price from $260 to $50 and a short-term bear market where it bottomed out in July of 2013.
Data from All-time Bitcoin price chart at bitcoin.zorinaq.com.
Then, from there it started its climb to break $1000 before encountering another strong correction in December of 2013 where BTC would tumble almost 50%. This triggered what would be identified later as the first halving’s bear market, where the lowest point it would hit in this period would be about $177 in January of 2015. From here, BTC would consolidate in this area before breaking out in October/November of 2015.
The second halving would follow on July 9th of 2016. By December of 2017, BTC would see a new peak of around $20,000, but it would find itself below 10k by March of 2018. This dip is believed to mainly be caused by whales (or large investors/hodlers) taking profits as well as retail investors. Some also said that the fact that the vast majority of holders were in profit at that point could have also been a potential top signal.
The dip happened extremely quickly, losing 45% of its value in six days going from $19,798 to $10,961. After this, BTC would remain in a bear market before reaching a bottom on 12/16/2018 of $3,214. From there we’d receive higher highs and higher lows into the next halving cycle.
Before moving onto the current halving cycle, there are some important fundamental factors regarding the previous two cycles to keep in mind.
Firstly, these previous cycles were often only influenced by whales and retail traders. This was a large reason for the extreme volatility. Secondly, leverage, derivatives, and bots weren’t nearly as prevalent as they are today. So, often it was just the spot market, and derivatives at the time did not have nearly as much influence on the market. Thirdly, institutional support was just not there. The larger traditional market players were still scoffing at the cryptocurrency industry and little to none of them had exposure to the asset class. Lastly, the coins available in the market were nowhere near as close as they are now to providing useable services and licensing out their technology.
Many coins have a use-case scenario now and aren’t necessarily strictly speculation anymore. This has resulted in a more mature asset class and a larger, more well-developed community behind it.
There was one more large-scale dip that occurred before the third halving cycle began in May of 2020. While it’s often debated whether BTC is directly influenced by the regular market (sometimes it is, sometimes not as much), there is no doubt that the dip in March of 2020 was a reaction to both the regular markets and the global pandemic. In two days, BTC would dive by 50%. From mid-February to mid-March Bitcoin would go from $10,000+ to levels below $5,000 with it bottoming out around $3,800 on 3/12/20.
4hr candle chart from February through March of 2020.
On that day, there would be a single 4hr candle that dipped from 7400 to a close of $6,000. By the end of the day, BTC would have another 4hr candle that went from approximately $6,000 to a close of $4,800 with a wick that went down to $4,400. The fundamental factors that surrounded the time of this dip were clearly a large influence on price action.
One thing that is noticeable about this dip is that it still stood above the earlier bottom from December of 2018. It’s also notable that by this time, institutional interest was more of a factor as well. The industry had matured. There were more hands in it, and many more eyes watching it.
The next large-scale nosedive is the most recent one. The April/May 2021 dip was a slightly larger dip than the one in March 2020. With BTC seeing a 53% correction. After reaching a peak of over $64k in April, by the end of May, we’d have visited levels in the mid to low $30,000s. The trip down from $58k to $36k would only take a week.
This dip was an interesting whirlwind of more modern, as well as some older, cryptocurrency-oriented problems. The cryptocurrency landscape had changed immensely since the previous dip in 2020. Now, many token projects were more fleshed out, institutional interest was at an all-time high, and the vast majority of the market was well into price discovery territory.
However, things weren’t necessarily all good. The industry would be in for a shock as a perfect storm of both technical factors and fundamental factors brought forth the 50%+ dip. First, let’s take a look at things on the technical side.
Bitcoin daily candle chart from December to now, showing the May 2021 crash.
Since the market had matured immensely, so had the access to leverage, lending, and the overall derivatives market. This type of access would be a bit of a double-edged sword for cryptocurrency. While it would help provide more trading options, it also provided more risky trading options to largely inexperienced retail traders which is a reality that the industry was forced to acknowledge after this dip.
There was no doubt that leverage played a role in the rocket climb to $64,000 from the low a little over a year before of $3,800. As quickly as it can influence the market on the upside, it can influence the market on the downside just as much. With many traders being new, or inexperienced using leverage, this created an environment in the market where many were over-leveraged and very close to their liquidation prices. So when the flash crash started to occur, countless were liquidated and trading bots with stop losses helped further exacerbate the sell-side pressure.
This created a vicious cycle of sell-side pressure that made for a dangerously volatile cryptocurrency market. On-chain analysis would later show that most of these sales were coming from retail traders and not institutional/larger traders because most of the sales were being made on exchanges. While at its most volatile, some whales and institutions were more hesitant to buy until it started to settle with strong support. Eventually, once the market settled in the mid-low $30,000s whales became some of the largest purchasers of BTC.
In the longer term, Bitcoin’s climb up to $64k was so quick, that it wasn’t incredibly surprising that there would be a correction afterward. Glassnode, the data aggregation company, even noted that the vast majority of holders were now in profit which had not been the case since the previous all-time-high was reached in the last halving cycle. While of course there were other metrics that suggested it wasn’t the same as when BTC would reach a new cycle peak, this could be used as a potential signal for a market dip.
On the fundamental side, there were a few influential events that had a direct impact on downside price action. On May 12th, Elon Musk tweeted that Tesla would no longer accept Bitcoin as a form of payment. This brought about a dip that went from $54,000 to $49,000 in a single 4hr candle. Elon continued to fan the fires after making this announcement through tweets and other means. This is all only months after Tesla announced it had purchased Bitcoin and would accept it as a payment and only weeks after Tesla sold a portion of their Bitcoin to test liquidity.
The other main influential fundamental factor was China’s ban on mining. In mid-May, China announced that it would have a strong crackdown on BTC mining. This would further drive prices down from the mid-$40,000s to the low to mid $30,000s. Even though this was the umpteenth time that China had a cryptocurrency-oriented type of ban, this actually had a significant influence on the market.
BTC’s hash rate from blockchain.com.
While hash rate doesn’t always correlate with price action, it should be noted that it can often correlate by providing an idea of the number of transactions being approved on the blockchain. In the time following these bans where China started shuttering mines, the hash rate (or the transaction rate) decreased significantly since China previously was responsible for about 65% of BTC’s hash rate.
By the beginning of July, the hash rate would bottom out and start to recover after many miners attempted the relocation process, and demand was met elsewhere.
Knowing the context behind these large market sell-offs provides useful context for how the market moves, more specifically BTC. This is important for creating trading strategies, knowing what type of fundamental events may impact price, and helps you with a general idea of what to look for when trying to find the relevant causes of a dip as well.
You can’t truly say you understand the industry if you only understand the inner workings of what makes the price pump. You must also understand what makes the price fall.
This is an excerpt from our October Monthly Newsletter. Read the full newsletter here: https://www.cryptofal.com/daily-reads/october-newsletter