Bitcoin Crash Trading Strategy — What Is It?

Last Updated on September 7, 2022 by Oddmund Groette

The rise of Bitcoin and cryptocurrencies has offered traders and investors another asset market to play in. One important characteristic of this market is its extreme volatility. To play in the market, one must have a strategy for the frequent market crashes. But what is a Bitcoin crash strategy?

In traditional financial markets, a crash is widely regarded as a decline of over 10% in price over a short period. Being a highly volatile asset, a Bitcoin crash is defined as a decline of 50% or more from its most recent high. A Bitcoin crash trading strategy refer to the methods traders use to protect their portfolios and even take advantage of the price decline.

In this post, we take a look at Bitcoin and the market crash.

What is Bitcoin?

Bitcoin is a cryptocurrency, an emerging asset class described as a digital currency that is cryptographically secured through a decentralized peer-to-peer blockchain network. Bitcoin is the first one to emerge, introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. This asset can be sent from one user to another without a middle man, so it is not under the authority of a central bank.

Bitcoin is kept in digital wallets, which consist of a public address (what the owner uses to receive Bitcoins) and a private key (just like a password) that the owner uses to access the wallet. People can send Bitcoins to each other through their public addresses, and each Bitcoin transaction is authenticated on the blockchain network run by Bitcoin miners.

Interestingly, Bitcoin is now traded as a security and can be exchanged with fiat currencies or other cryptocurrencies on crypto exchanges, with the ticker symbol BTC. Its value against fiat currencies, such as the EUR or USD, depends on demand and supply, rather than the policies of central banks.

What is a Bitcoin crash?

Traditionally, a market crash is defined as a fast drop in the price, usually more than 10%. But being a highly volatile asset, a Bitcoin (BTC) market crash occurs when the BTC price drops drastically and often unexpectedly – declining by up to 50% from its most recent all-time high.

However, traders use other ways to visualize and identify a crash, rather than measuring the size of a day’s price bar. Crypto traders can identify a crash on their charts by watching price reactions to a moving average. Many crypto technical analysts tend to use the 50-day and 200-day moving averages — the price closing below the 200-day moving average or the 50-day moving average crossing below the 200-day moving average (a death cross) is seen as a sign of a market crash.

Bitcoin crashes are often caused by sudden and impactful changes or events in the crypto market that cause panicked investors to liquidate their positions en masse. Crashes can also be caused by unverifiable rumors that spread FUD (fear, uncertainty, and doubts) in the market.

How many crashes does Bitcoin have?

Apart from the current crash, which has seen Bitcoin decline by about 74% so far, the Bitcoin market has crashed seven other times in the past. That is, there are seven other times it had declined by up to 50% from its most recent high.

When were the different Bitcoin crashes?

The seven Bitcoin crashes in the past are as follows:

June 2011
Bitcoin had soared from $2 to more than $32 in 2011. But on June 19, when Mt. Gox — the largest Bitcoin exchange in the world by far — admitted that criminals had hacked hundreds of accounts and stolen millions of USD worth of Bitcoins, the value of a Bitcoin fell to one penny within a single day, representing a 99% decline.

August 2012
When the news that a Ponzi scheme had stolen 700,000 Bitcoins by deception, the value of Bitcoin crashed by about 56%. The culprit was later charged, convicted, fined, and imprisoned.

April 2013
As Bitcoin gained popularity and investors piled on to get a bite of the new opportunity, Mt. Gox, the biggest crypto exchange at the time, couldn’t handle the trading volume, so its website crashed. Bitcoin prices went from nearly $260 to $50, an 83% decline.

December 2013
This was the time China banned Bitcoin for the first time. According to the Guardian, Bitcoin lost 50% of its value overnight, following the ban.

December 2017-December 2018
After a remarkable performance in 2017, which saw Bitcoin break all its own records and peak near $20,000, on Dec. 27, the price started to crash, as profit-taking dragged the price below $12,000 by the beginning of the new year. By the end of 2018, Bitcoin price had fallen by over 84% following news of major hacks in Korea and Japan.

March 2020
When the global financial markets crashed in March 2020, following the emergence of the Covid-19 pandemic, the Bitcoin market crashed even harder, losing about 60%.

May 2021: -53%
After its amazing performance on the back of the pandemic recovery package and news of mainstream adoption, hitting an all-time high of $64,000, the market crashed in May 2021, losing over 53% of its value.

Bitcoin crash trading strategy (backtest and example)

We have previously published a cryptocurrency trading strategy.

A backtest of bitcoin crash trading strategy is coming soon.

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