Why does crypto crash?

Crypto prices fall for the same basic reason any price falls: more people want to sell than buy at the current level. What sets crypto apart is how quickly a dip can become a rout. A handful of recurring forces explain most sharp declines.

What causes crypto to fall?

Interest rates and the wider economy. Crypto tends to trade like a risky asset. When central banks raise interest rates, safe investments pay more and investors have less appetite for speculation. The long decline of 2022 came as the US Federal Reserve raised rates at the fastest pace in decades. In March 2020, as the pandemic hit global markets, bitcoin lost close to half its value in about two days.

Regulation and legal news. A lawsuit against a large exchange, a ban on mining or trading in a major country, or a rule that restricts access can change expectations overnight. China's crackdown on mining and trading in 2021 is a frequently cited example.

Hacks and failures. When a big platform breaks, holders rush to sell or withdraw, and trust in similar platforms suffers. The collapse of the TerraUSD stablecoin in May 2022 and of the exchange FTX that November each dragged the whole market down.

Sentiment. Much of a coin's price rests on expectations about future demand. When the mood turns, there are no profits or dividends to slow the fall.

Why do falls turn into crashes?

The main accelerant is leverage, which means trading with borrowed money. A trader using futures and leverage posts a deposit, known as margin. If the price moves far enough against them, the exchange automatically closes the position. That is a liquidation.

Liquidations are forced sales. They push the price lower, which triggers more liquidations, and the process can cascade within minutes.

Two other features add to the effect. Crypto trades around the clock, with no closing bell or trading halt to give sellers time to think. And outside the largest coins, the pool of buyers at any moment is shallow, so heavy selling moves prices a long way.

Do all coins fall together?

Mostly, yes. When bitcoin drops sharply, smaller coins usually drop further, because they are harder to sell and more reliant on enthusiasm. Individual coins can also crash on their own, after a hack, a sale by a large holder, or a rug pull, in which developers abandon a project and take the money.

Does a crash mean prices will recover?

Nothing guarantees it. Bitcoin has fallen by more than 75% from a peak several times and later gone on to new highs. Thousands of smaller coins fell and never came back, as past bull and bear markets show. A past recovery says nothing certain about the next decline.

This guide explains the general causes. For what is moving prices on a given day, see Cryptoweek's Markets section.