What drove crypto markets way up, and then way down?

The kind of money that fueled explosive growth in 2017 was marked heavily by buyers’ fears of missing out, and the belief they were buying near sure-thing lottery tickets, without a great deal of knowledge as to what they were buying into beyond superficial talking points.

With the public rushing into what they believed was a gold rush, at the tail end of a near decade-long bull market (it is generally too late when the public gets in), and prior investors dedicated to a HODL philosophy of never selling, you had a market structure in which everyone was long, and almost no one was short.

All market tops are marked in this way, and all bottoms are marked with usually record numbers of shorts for that market. It’s the long liquidations that create the crash-like moves, and the short-covering that creates the reversals up from bottoms.

The retail money that came in was immense. More money came into the sector in the last quarter of 2017 than all money that had come in before then combined, and that kind of money will scare out as quickly as it jumps in.

Once minor selling started in late December and early January, that selling begot more selling, as a market no longer composed primarily of technologists and true believers but of uninformed and more emotional buyers (and thus those less capable of HODLing when push came to shove) panicked out.

Fairly quickly, a market that showed only green turned into a sea of red, and the reality of facing real losses began to hit those who once thought the crypto gains of the past could simply be extrapolated forward from their very late points of entry.

This type of market behavior is not unique to the crypto market but characterizes the reaction after every bubble pop. The main difference is just the severity of the percentage decline. But, it’s not actually different when considering that the magnitude of the downswings has been proportional to the magnitude of the upswings leading up to the top.

TRENDPOST

As much as cryptos are likely to drop significantly even from here, this process will take some time. There are multiple levels of price support from which Bitcoin may find temporary lows on the way down to the $1,000s, where an actual long-term low is likely to occur.

However, it’s unlikely that any of these earlier support levels will create the kind of reversal that puts into question the ongoing bear market.