Bitcoin falls through a price level that should have been a support level sometime around 3 a.m., and by the time most of the U.S. has awoken, the entire crypto market has lost tens of billions of dollars in value overnight. You’ve been through this before if you’ve ever rejuvenated your portfolio and saw every coin go to the same shade of red at the same time. What people don’t realize is why it continues and why it continues in this particular and repeatable manner.
2026 has been a year to wonder. The days after reaching its all-time high price of just over $126,000 last October seem to be a different market for bitcoin. By mid-year, the coin’s price stood nearly half its previous level, trading in the $60,000s, and the overall crypto market capitalization had lost nearly $2 trillion from its peak in late 2025. After that, in another week this August, it reversed its course, breaking back up above $77,000, one of its best weeks since 2024. Crash and rally, in the same 12 months and back-to-back! It is about that whiplash that this article is about.
It is not that cryptocurrency fails due to bad luck or they are cursed on a particular coin. It is a result of a few built-in structural characteristics of these markets and a collection of outside forces that affect crypto a lot more than nearly every other asset class. The headlines don’t seem so random once you understand the two.
What is a Crash in Crypto?
Not all Red Days are crashes. Crypto is volatile, and the news of a 5-10% daily swing is only news to a small degree. The word crash is typically used for something more severe: a 20% or more drop, measured in days or weeks, accompanied by increased trading volume, a flurry of forced selling, and a clear switch from greed to fear in sentiment.
The difference between crypto’s crash and the stock market’s crash is not psychological, but structural. Circuit breakers are automatic trading halts that are also used on the New York Stock Exchange and Nasdaq when an index drops too quickly. They are designed to allow panic to cool off. There isn’t anything like crypto. It is a 24/7/365 day trading system with dozens of exchanges, no central authority with the authority to halt anything. It can begin on a Sunday night, when the trading desks are light on staff and most institutional participants are away, and it can last for hours before the volume of buyers comes in to put a damper on the sell-off.
The Real Reasons Cryptocurrency Crashes
Leverage Turns Corrections Into Collapses
The majority of the crypto crashes are not just a sell-out. Are a story about people being forced to.
Crypto exchanges facilitate the margin trading of cryptocurrencies with leverage, and sometimes up to 50x or 100x the trader’s real money, via perpetual futures contracts. As soon as the price goes against a leveraged position, the exchange will automatically close it to ensure that the trader’s losses are not greater than the collateral. This forced closure is in effect a sell order, which pushes the price just a little lower, which puts the next level of leveraged positions into play, and so on. This is what traders refer to as a liquidation cascade and is by far the biggest factor that crypto can drop 10% an hour, even though nothing fundamental is changing.
The numbers from 2026 show how fast this compounds. Bitcoin fell to around $63,000 in 24 hours in late February, as U.S.-Iran tensions escalated into an outright conflict, while over $300 million worth of leveraged positions were force-liquidated in this period. About $744 million in leveraged positions were liquidated in a single day a few months later when Bitcoin dropped below $70,000 after corporate treasury firm Strategy, best known for its aggressive Bitcoin purchases since 2020, finally dipped into its holdings for the first time in four years. Both of these events occurred without failure of the technology itself. They were caused by a large amount of borrowed money being unwound at one time.
Thin Liquidity Makes Every Move Bigger Than It Should Be
The traditional stock exchanges are dependent on institutional market makers whose role is to ensure that there are buy and sell orders at each price level, and that a large order does not cause a significant price change. Crypto also has such a thing, but it doesn’t have the same people working around the clock. Market-making activity slackens, and slackens more on weekends, leaving the order book the list of all buy and sell orders waiting to be executed shallower overnight and even shallower still on the weekend.
That thinness changes the math of every trade. A sell order that could push Bitcoin’s price half a percent Tuesday morning, when there’s plenty of liquidity, can push it several times that Sunday night, when there’s less. That’s one of the reasons why many notorious crypto crashes appear to occur at unusual times or during a weekend. It isn’t superstition. It’s a bit of a smaller market picking up the same volume order it normally takes in stride.
Crypto Doesn’t Trade in Its Own Bubble Anymore
One of the main attractions of crypto to true believers was that it was not dependent on traditional markets, and it was a hedge against everything else, for much of the 2010s. That is no longer the case, and not a story that anyone has been talking about. Because spot Bitcoin ETFs gave way to large-scale institutional participation, crypto has become even more leveraged than tech stocks, its price goes up more when the tech stocks are doing well, and it goes down more when the tech stocks are doing badly.
2026 made that correlation obvious. Risk assets of all stripes, from stocks to tech to crypto, all sold off at the beginning of this year when the U.S. introduced massive new tariffs, investors discounting the prospect of more inflation and the Federal Reserve being less inclined to cut interest rates anytime soon. Later, AI-earnings anxiety hit Nasdaq-listed tech stocks, jolting traders who were simultaneously holding both stocks and crypto into action to sell both. Crypto is one of the most liquid and easiest-to-sell assets in a fund’s portfolio, with trades happening hourly, every day, so when a fund panics to sell off something to make up for a loss elsewhere in the portfolio, crypto’s usually the first asset on the chopping block, not the last.
Geopolitical Shocks Travel Through Oil, Not Just Headlines
One could not see the direct correlation of a war on the opposite side of the globe to the price of Bitcoin, but the connection is rather straightforward when followed. Any escalation that takes place in the vicinity of the Strait of Hormuz, the world’s most vital oil shipping route, drives crude prices up almost immediately. Oil increases inflation. The inflationary trend makes central banks reluctant to lower interest rates. High and persistent interest rates make non-yielding assets less attractive to hold, and crypto assets are no exception.
The same sequence of events happened several times in 2026, when U.S.-Iranian relations were on fire. During one such sharp rise in crude oil price, crude went back up above $107 a barrel, and crypto went down within hours even though nothing in the Bitcoin code, adoption, or supply had changed at all. It was just that the asset was okay. The macro environment around it wasn’t.
When One Company Falls, It Takes Others With It
This is a risk that is truly unique to crypto, and it actually triggered the ugliest crypto crash ever. An algorithmic stablecoin, in particular, an algorithmic stablecoin worth $1, called TerraUSD, deviated from the peg in May 2022. When the price of UST fell below $1, enormous quantities of Luna were minted to prop up the price, causing the price of Luna to crash and making the defense mechanism worse instead of better. In a matter of days, a project that was worth tens of billions of dollars now wasn’t worth much more than a dime, and over $18 billion got wiped out of the crypto market that month alone.
The collapse of one of these counterparties was not contained, as both crypto’s lending platforms and exchanges are counterparties to one another as well as to the crypto-hedge funds. Over the next few weeks, it pulled down the lender Celsius Network, the hedge fund Three Arrows Capital and the trading platform Voyager. By November, it had spread to one of the world’s largest exchanges, FTX, worth $32 billion, which was secretly using customer funds to keep its trading business alive. This went under in bankruptcy in just days, taking with it the money of more than a million users. The total losses for the 2022 cycle are estimated to be $2+ trillion in market value.
That is the version of a crypto crash without the macroeconomic factors, and with only the question of who else is exposed to the same firm, and the safest thing to do is to get the money now, ask questions later.
Regulation Cuts Both Ways
Government intervention can have as much impact as it can in the other direction, and crypto markets know how to take such headlines to the bank as soon as they’re announced. Regulation, whether it is a country declaring a trading ban, an enforcement action on a large exchange, or a crackdown on stablecoins, can trigger a quick sell-off in the market, since regulation has a direct impact on the on-ramps and off-ramps for people to use crypto as usable currency.
The same sensitivity works in reverse. Regulatory approval of some new investment product, or market-friendly legislation in the U.S., or even just improved words from regulators, can quickly push prices higher, because they reduce the long-term risk of owning the asset. This is one of the reasons why crypto is so sensitive to political news compared to anything on-chain. The rules of the game can change, but the technologies don’t.
Fear Spreads Faster Than Facts
Crypto remains a retail-driven market versus its scale, and sentiment is therefore more volatile than it is in more institutionally driven markets. Tools have been made to measure this: during the most dire period of the 2026 bear market, the Crypto Fear & Greed Index has been in Extreme Fear mode for 46 days in a row, even reaching as low as 5 out of 100.
Such fear that lasts feeds on itself. One big trader’s word, one day’s rumour, or one misleading screenshot can make a significant difference in a market that never winds down and never resets from one day to the next. The same psychology creates FOMO buying on the way up, driving the valuation to extremes that are not supported by fundamentals, setting up the eventual correction in the first place.
Institutional Money Giveth and Institutional Money Taketh Away
The latest twist and, perhaps most crucial to know about crashes moving forward, is who is really doing the selling. The damage was virtually all crypto-native in 2022, as over-leveraged retail speculators and crypto-only companies went under. 2026 looked different. None of the major exchanges failed. No stablecoin depegged. The real reason for the price decline was the redemptions of ETFs, unwinding of institutional basis trades, and large funds switching capital to AI and semiconductor stocks.
It’s a significant change. It implies that the biggest price moves in the crypto market are becoming more correlated with the same types of institutional flows that make traditional markets move than with crypto-specific blowups. Though this doesn’t mean the volatility is any less real when someone is watching their portfolio, it helps to explain why this year’s crash didn’t come with any major platform collapsing, unlike 2022.
A Brief History of Crypto’s Biggest Crashes
It is important to remember that there has been a 50-80% drawdown from peak to bottom during every major crypto cycle.
The first major crash that Bitcoin experienced was back in 2011, when the value of Bitcoin dropped from $32 to about a penny in a matter of days, after the hacking of the Mt. Gox exchange and the loss of 850,000 BTC. The bear market of 2018 saw 84% of Bitcoin’s value evaporate from its all-time high, as the entire ICO craze came to an end and many initiatives launched with little substance behind them failed. The year 2022 saw the demise of these two, and of many others: Terra/Luna and FTX, which crashed over $2 trillion in value, marking the beginning of what many in the industry continue to refer to as crypto winter. This time, there was no major crypto-native failure to blame for the drawdown tariffs, geopolitics, and institutional rebalancing were responsible for the drawdown of over 50% from the all-time high in October of 2026.
The correlation between all four is a sudden drop, followed by “is crypto dead?” headlines permeating the entire web, and then a recovery that takes the price back up to a new high. It does not mean there will be a repetition of the next cycle. It does imply that, however, for 15 years, it has been a losing bet to take the fight against crypto.
What to Do When the Market Goes Down
Each of the above forces is beyond the control of an individual investor. What you can control is the amount of exposure you have to them.
First, leverage, because it’s the quickest way to make a run-of-the-mill correction into a complete loss. When one does not use borrowed money, he cannot be liquidated, period. If you open margin or perpetual futures trades, be aware of your liquidation price beforehand, and not after the price has already gone against you.
Make sure you’re mindful of the locations of your crypto. FTX and Celsius have both shown the industry the same thing twice: if crypto is held on an exchange, it is not yours, it is only as long as they are able to make a recovery. By transferring long-term holdings to a wallet that you control, this particular risk is eliminated, but you’re taking a new risk in the process: your recovery phrase is your only line of defence. It must be stored offline, protected securely, and never typed into anything that is online. It is best to read about what a seed phrase is and how it works before transferring any significant amount of money off of an exchange.
Unfortunately, crashes are also a favorite time of the year for scams. As with every major crash, fake recovery agents come out of the woodwork claiming to be able to move or recover money, fake websites are created that mimic the real exchange sign-in pages, and wallets are drained through fake security alerts. The exploit is the panic. Sometimes, when you’re about to transfer money somewhere or log in to a wallet to a different site, there may be an opportunity to check the destination address with a scam checker to make sure it’s not already been reported, which can take a few seconds and save an entire portfolio.
There are a couple of other habits that are truly helpful. Never layer leveraged borrowing onto DeFi lending positions and, therefore, liquidation risk on top of anything else that is going on on centralized exchanges. Ensure that the size of positions is small enough that a 50% drawdown doesn’t alter your lifestyle. Don’t check prices every hour during a crash, as this is the setting in which panic-selling takes place at the worst time.
Will Cryptocurrencies Continue to Crash?
Yes, definitely, in at least the sense that there have been sharp, sudden drawdowns in every single cycle since Bitcoin’s inception, and there’s no reason, structurally, to believe that is going to change. All the mechanics are still very much alive and kicking, from leverage and thin liquidity to macro correlation, sentiment and, in some cases, outright contagion, and crypto remains a 24/7, globally traded and retail-heavy asset class competing for capital with much older and more liquid markets.
However, the same rules apply the other way around, so it’s important to remember this next time a crash appears to be forever. With bond-buying news and a round of short liquidations, the same market that sent Bitcoin reeling through the $60,000s during most of the first half of 2026 returned with a 20%-plus weekly gain within a few months. In the realm of crypto, crashes and rallies are not antithetical occurrences. They’re the same volatility pointed in different directions.
All of the above is not financial advice, and nobody can ever really mark the bottom or the top. But understanding why crashes happen, rather than just watching them happen, is what separates a panicked exit from a decision you can actually stand behind six months later.
