How to Spot the Next Crypto Crash Before It Happens: 5 Signs to Watch Out

Why Trust Techopedia

The Bitcoin (BTC) halving has come and gone, and despite overall market sentiment that the BTC price would have hit a new high post-halving, the cryptocurrency did not manage to surpass its previously reached all-time high of $72,000 since April 19, 2024.

As the BTC price currently fluctuates at around $62,121 as of April 29, 2024, investors are on the lookout for a potentially upcoming bear market.

BTC/USD Year-to-Date Performance.
BTC/USD Year-to-Date Performance. Source: TradingView

High market volatility, regulatory changes, technological failures, and overall negative market sentiment are some of the red flags investors look out for when trying to predict the crypto market’s direction.

How do you spot the next crypto crash before it happens?

Key Takeaways

  • Experts suggest remaining vigilant for signs of unsustainable price surges, abnormal trading volumes, and concentration risks, which may indicate an impending market correction.
  • Staying informed of regulatory changes and negative news is crucial, as they can trigger panic selling and price declines in the cryptocurrency market.
  • Keeping an eye on shifts in overall market sentiment, particularly the transition from euphoria to fear, is essential.
  • Analysts advise investors to prepare for a potential bear market with caution.
  • These could include taking steps to diversify their portfolio, utilizing risk management tools, staying informed about market trends, and minimizing leverage.

5 Signs of an Upcoming Crypto Crash

1. High Market Volatility

Can Picak, the CEO and co-founder of DIGA Labs, noted that in the lead-up to a potential crypto market crash, a specific pattern emerges in the trading volume, price movement, and market capitalization of cryptocurrencies.

This trend is often seen as an unsustainable, rapid increase in an asset’s price that outpaces market fundamentals and is often referred to as a “bubble.”

Advertisements

A surge in trading volume follows as investors flock to the market amid the fear of missing out (FOMO). This could lead to an asset’s market capitalization growing disproportionately, thus creating concentration risk.

Picak told Techopedia:

“Finally, watch for a spike in trading volume that doesn’t align with typical market behavior — this can be an early warning of increased speculation or manipulative trading practices, which can precipitate a sharp downturn when the market corrects itself.”

Investors can also look out for bearish chart formations such as the ‘head and shoulders pattern,’ the co-founder and CEO of Wisdomise, Dr. Fardad Zand, added.

Head and Shoulders Pattern Example.
Head and Shoulders Pattern Example. Source: TradingView

Zand told Techopedia:

“Noteworthy instances include an analysis from the previous year highlighting a head and shoulders pattern and diminishing volume for the USDT stablecoin as potential warning signs of a market downturn and a shift towards Bitcoin and alternative coins.

“Nonetheless, no singular indicator is entirely reliable; hence, a comprehensive analysis incorporating various trends and patterns is recommended when attempting to predict a potential market downturn.”

2. Regulatory Changes and Negative News

Regulatory changes are another indicator that could heavily influence the direction of the cryptocurrency market. Announcements of stricter regulations, for example, can trigger panic selling.

In addition to regulatory changes, negative news surrounding a certain asset can also force crypto market prices to dip, as it creates fear among investors, who often tend to act upon it, frightened of losing even more money.

Yale ReiSoleil, the CEO and co-founder of untrading, told Techopedia:

“Negative news related to a specific cryptocurrency or stricter regulations on cryptocurrencies overall can trigger a sell-off and price decline.”

3. Technological Failures

Technological failures such as security breaches or flaws in blockchain technology are also prone to quickly erode the trust of many investors and could lead to sell-offs, DIGA Labs’ Picak noted.

4. Whale and Long-Term Holder Activity

The activity of long-term and whale crypto holders can also lead to a potential bear run in the market as all on-chain activity remains visible within the cryptocurrency community.

The head of business development (APAC) at Keyrock, Justin d’Anethan, explained:

“If an address holding massive amounts of crypto transfers it to exchanges, that is visible; if an address that has not moved for years and held through a bear market moves coins, that is visible. When those behaviors take place, it either means that prices are so high that they are motivating those long-term and potentially more sophisticated players, or maybe they know something we do not.”

5. Shift in Sentiment

Finally, the overall market sentiment within cryptocurrency communities also tends to play an important role when looking out for warning signs in case a market crash is about to take place.

“As a crash approaches, market sentiment shifts from euphoria and overconfidence to fear and panic. Investors become more erratic, driven by emotion rather than fundamentals,” untrading’s ReiSoleil noted.

Signs of an Upcoming Crypto Crash

Additionally, because crypto communities are so driven by social media platforms, social media sentiment also plays an important role in analyzing potential market trends.

Multiple platforms and event trading shops continue to monitor social media platforms such as X.com and Reddit to gauge investor sentiment regarding both activity and words used to describe the current situation in the crypto market.

4 Analyst Tips in Preparing for A Bear Market

So, how can you best prepare for an upcoming bear crypto market?

1. Portfolio Diversification

One of the most crucial steps investors can take to protect themselves from losing too much money during a bear market is portfolio diversification, DIGA Labs’ Picak noted.

By spreading investments across various asset classes and cryptocurrencies, investors reduce risk exposure and stand to lose less money than they would have if they invested all their funds into one cryptocurrency alone.

Keyrock’s d’Anethan added:

“In crypto, maybe more so than traditional finance, the risk of entrusting your crypto to centralized counterparty – which might be either totally fraudulent or, with best intentions, try to provide a yield to leveraged traders or third-party yield generators – can be a dangerous set-up.

“Here, as with everything, it’s worth not putting all your eggs in one basket. And this holds true for warm wallets and decentralized platforms which themselves are still susceptible to smart-contract risk, hacking risk, or operational mishaps.”

In addition to diversifying their portfolio, investors can also regularly adjust their portfolio allocations, ensuring they stay on top of the latest trends in the market.

2. Using Risk Management Tools

Additionally, investors can use a number of risk management tools, such as stop-loss orders that will automatically sell an asset at predetermined levels, preventing further losses and second guesses.

3. Staying Informed

Keeping up-to-date with market news and trends to anticipate any potential negative downturns to regulatory changes will also help investors predict whether a bear market is on the way and avoid massive losses by taking the necessary steps.

4. Avoiding Leverage

Minimizing or even avoiding leverage is another important factor investors must consider when trying to minimize potential losses during a bear market.

Keyrock’s d’Anethan said:

“It might be hard to resist in periods of enthusiasm, but even a 2-3X leverage can lead to losses that will wipe out the entirety of the capital available and thus leave you helplessly sidelined.”

The Bottom Line

The aftermath of the recent BTC halving has left investors on edge, with some anticipating a potential downturn in market sentiment.

Identifying the signs of an imminent crypto crash becomes paramount, with volatility, regulatory shifts, technological vulnerabilities, and shifts in investor sentiment serving as crucial indicators.

By understanding these warning signals and implementing strategic responses such as portfolio diversification, using risk management tools, and avoiding leverage, investors can brace themselves for the storm and safeguard their assets against potential losses in the uncertain terrain of digital currency trading.

FAQs

Is crypto going to crash in 2024?

How do you know which crypto will go up or down?

How do you know when crypto will fall?

Advertisements

Related Reading

Related Terms

Advertisements
Iliana Mavrou
Crypto journalist
Iliana Mavrou
Crypto journalist

Iliana is an experienced crypto/tech journalist reporting on blockchain, regulation, DeFi, and Web3 industries. Before joining Techopedia, she contributed to a number of online publications, including Capital.com, Cryptonews, and Business2Community, among others. In addition to working in journalism, she also has experience in tech and crypto PR.  Iliana graduated from the City University of London with a degree in Journalism in 2021. She is currently pursuing a Master's degree in Communication.