There was no stopping on Thursday. Along with the traditional financial markets, bitcoin lost 30% within a very short time. After temporarily bottoming out, the price dropped below USD 4,000 on the same day, corresponding to the previous day’s bitcoin crash, which wiped 50% from crypto’s leading currency.  What led to the current Bitcoin crash? 3 factors can be identified: Expectations too high The properties of bitcoin are impressive. A valid alternative for decentralized value transfer. Censorship-resistant and trust-free. The path which bitcoin has taken, in its almost 11 years of existence, is impressive and unprecedented. The chances of continuing in this direction are good. Driving this trajectory is the implementation of bitcoin in the traditional investment universe, as well as the arrival of younger generations who are more critical of conventional financial institutions, as opposed to the newly emerging digital currencies. The impressive deflationary structure in times of unlimited money printing is another important point in favor of bitcoin. Thus, bitcoin  has all the right ingredients that could facilitate a sustainable and multi-year development. But there is the other, impatient side of the market, called the minnows.  The minnows are new investors who have little or no investment experience. They are a staple for sharks, looking for an easy meal. The reason for these minnows to gather stems from the absurd price movements predicted daily by questionable social media channels.  Such social media channnels thrive off of ever-grander price predictions, otherwise interest in their channels and in bitcoin may slump.  Thus, fulled by the deluge of fantastical price predictions, coupled with their strong instinct for flight, the minnows have jumped into the bitcoin-universe and expect to become millionaires instantaneously — with a few hundred dollars invested. Furthermore, the impending “halving” was all too readily cited as another reason why bitcoin will most certainly go “to the moon” in 2020. This generally leads to false and exaggerated expectations, which if coupled with price movements as seen over the past weeks, kick-starts the minnows flight instinct; as a herd-like selling pressure ensues. All this time, the the sharks watch and prepare to pick-off any stragglers. Leverage (lever) The crypto exchanges are miles ahead in offering instruments that allow for leveraged trading. While in traditional trading places central exchanges operate with different market participants, the crypto exchanges usually provide their own trading platform, including liquidity. The exchange providers sometimes try to attract more customers and outbid each other by offering the highest possible leverage. Thus, a leverage with a factor of 100x to trade bitcoins is almost part of the standard program. For example, the speculator can trade 10 bitcoins with a 0.1 bitcoin stake. However, his investment is then lost in a one-percent move against the hoped-for direction. This is called a margin call. On Thursday alone, positions in the amount of 710 million dollars were liquidated through so-called margin calls with a single exchange operator. There are many players crowding around the various trading platforms by big players called, whales,  hedge funds and the exchange providers themselves, some of whom act as market makers. Not to forget there is a huge number of individual participants (retail clients), who gain very easy access to leveraged instruments via these platforms. To cut a long story short. In the crypto-currency market we find ourselves in an environment driven by a great deal of speculative capital. The mixture of stock exchange operators, some of whom are able to display their books to the customer (conflict of interest), large players who are able to play their games, and retail traders who usually play poker too high and above their financial circumstances, repeatedly leads to corresponding sharp price movements. This can also happen in the other direction, as at the end of the bull market in 2017, where bitcoin gained 70% in only two days. Volatility is part of the program through this speculative mix. Risk Off – In stress situations there is no safe haven except cash Bitcoin enthusiasts in 2019 were pleased with an initial (random) correlation of bitcoin to gold. There was already talk of the new digital gold, which would soon replace the old metal as a “Save Haven”. But now we suddenly find ourselves in a stressful situation. The traditional stock and bond markets are currently in free fall. The coronavirus was the trigger that shook our fragile financial system. After periods of long upward movements, price corrections of 20 % and more have now become commonplace again. The overpowered investor only escapes the price losses by fleeing into cash. Every asset class that contains volatility is no longer desirable in the portfolio for the time being, or must be reduced due to excessive leverage. Even gold and, of course, crypto-currencies belong to the species that the investor wants to get rid of in such situations. Consequently, the “safe haven” myth has been massively weakened by the downward spiral in recent days. Why is this the case? Bitcoin is still far from becoming socially acceptable. Larger investors in this asset class usually consist of hedge funds, which primarily seek absolute returns. However, gold, which has had to work its way to safe haven status for centuries, is also under pressure in crisis situations. In the financial crisis of 2008/2009, for example, gold first lost a good 30 % before it started to soar again. The majority of investors, who dominate the market, are therefore also opportunistic in the crypto-currencies in the short term. Over time, the natural demand and the special supply situation of bitcoin will come to bear. What happens after the bitcoin crash? For starters, we don’t have a crystal ball here. Accordingly, we can only make guesses. It can be assumed that bitcoin, and thus incidentally all Altcoins, will have a certain correlation with the traditional markets. If the stock markets continue to decline, bitcoin should also remain under selling pressure. Thus, spheres around USD 3,000, which have already been tested in the short term, are quite realistic. While the capitulation of leveraged traders is now well advanced, the capitulation of long-term investors may still be needed. If the equity markets continue to fall, we see a high chance of this happening. In the medium term, an extended financial crisis may well raise people’s awareness of what money is and how it is currently used by central banks. Over time, this would inevitably lead to increased demand for asset classes such as gold, or even bitcoin, which are not arbitrarily inflationary. Depending on the impact of the expected economic crisis, this could take some time (months, years). Fundamentally, nothing has changed in bitcoin. Transactions, the number of wallets and the hashrate are at an all-time high. The monetary policy is also clearly defined. So the medium to long-term prospects remain good for bitcoin. If one believes in the fundamentals of bitcoin, one should invest realistically. Spread over time, on a scale where one can cope with current or even more severe price corrections. * Originally published in German at CVJ.ch