In the first week of December 2021, Bitcoin price crashed from $57,000 to $47,000 marking a 17% drop after a never-before-seen boom all year long.
What caused Bitcoin crash?
While many people are citing the frenzy sell-offs, this is just a reaction to the price crashing and not necessarily the cause. Experts claim that the issue had to do with investors using margin loans to buy Bitcoin hoping to make a massive profit at the end of the year.
What they failed to realize is one of the most important factors in trading cryptocurrency – risk. As explained on bitqt-app.com, “even if you’re as careful as possible with your trading and trade with a clear mind, you’re still going to be exposed to trading risks.”
And the risk is not something that is properly managed when it comes to margin loans, why? First, you have to understand the concept of margin loans. Jeremy Bowman of The Motley Fool wrote, “margin is investing with money borrowed from your broker.” While there are several other complexities, this is the basic meaning and with margin loans, comes margin calls.
Margin calls happen when brokerage, with their money invested in a market by investors, demands that their clients either pay more money for their loans or sell out their positions. And as we see in many cases, investors cannot pay back and the brokerage then tries to cover their loans by either liquidating the clients’ positions themselves or something else.
Therefore, with margin levels rising in the Bitcoin trading industry, the risk of bigger sell-offs was obvious to experts. As far back as April 2021, the signs were already there because margin loans were already higher for the year than the whole of 2020. Why though was there much more borrowed money in Bitcoin?
Related article: What is the minimum amount to invest in bitcoin? – Not $57,000+
2021 boom
CNBC reported in January 2021 that Bitcoin price had increased by over 700% since March 2020. Take note that at this time, the price was still hovering at $40,000. Then, within a month, it shot up to $50,000 on 16 February 2021.
There was blood in the water! The sharks were definitely going to smell it.
In March, Bitcoin rose to $61,000 and then $64,000 before a small correction pulled it back to $49,000. Yet, investors and speculators alike could see the potential. It is also noteworthy that it was not the only cryptocurrency eating well. In May 2021, Dogecoin rose by almost 20,000%. Even its decline to $31,000 did not discourage the money from pouring.
