Let’s talk about a common but deadly issue in crypto: leveraged trading. Simply put, it’s borrowing money to trade cryptocurrencies. For example, if you use $100 with 5x leverage, it’s like operating a position of $500. It feels great when the market is up, but once it drops by 20%, that $100 principal gets liquidated, leaving you with nothing. Recently, with any negative news, a large number of leveraged long positions have been 'liquidated,' causing automatic selling, which further crashes the market. It can even trigger panic selling in a domino effect, crushing the market in a short period.
Such a crash often ends within a few days, followed by a V-shaped rebound in the market. Why? Because the drop is too severe, many people feel it has become cheap and start to buy the dip. Interestingly, this 'rebound' is often caused by short sellers 'covering their positions.' Those who bet on a price drop see the trend reverse and quickly close their positions to stop losses, which also drives the price up.
However, whether the rebound can last depends on what caused the drop. If it’s a true black swan event, like sudden geopolitical tensions, the recovery might not be quick. But if it’s just short-term emotional selling, the rebound can come back quickly.
At this point, some might ask how to assess what is currently happening in the market. You can go to a website—CoinGlass—to see if there are a lot of liquidations. If many people are liquidated in a short time, it’s likely just a short-term drop, not worth panicking over. Conversely, if the market is changing due to macro factors, like the Fed suddenly turning hawkish or sudden geopolitical tensions, then you need to be a bit more cautious.
Macro negative factors are the real big boss affecting the market. Monetary policy, fiscal policy, and international relations—these three together make it hard for the crypto market to rise. It's like no matter how much you try to light a fire, you can't without fuel. Earlier this year, similar situations occurred; although favorable news like Bitcoin ETFs came one after another, the price couldn't rise due to a bearish macro environment.
If you want to determine whether the macro situation is causing chaos, you can compare the stock market and the cryptocurrency market. If both are down, it is likely a global issue; but if only the cryptocurrency market is falling, it’s probably just a small incident within the community. For example, a project has collapsed or a prominent figure has run away, these are internal catalysts in the crypto space.
So we need to distinguish whether the bearish catalyst is 'temporary' or 'permanent.' For instance, if the founder of an NFT project is replaced, it might just be a minor issue, possibly even a buying opportunity. But if the team behind the project runs away or the funding chain breaks, it might not come back.
For example, some projects periodically unlock tokens, and many people panic, fearing a price crash. But the truth is, the unlocking itself might not cause a price drop; often the price has already fallen in advance because everyone rushes to sell early. The unlocking itself isn't the issue; the problem is whether there are buyers. If no one is there to take over, the price naturally won't rise and may even be driven down by some early large holders selling low.
However, this doesn't mean you should think everything is good. Some things are indeed permanent negatives, such as the recent closure of channels supporting crypto in the U.S. banking system, which is a hard blow. Exchanges and institutions can no longer transfer large amounts of money as they used to, leading to a significant decrease in liquidity. Fortunately, these channels are gradually reopening, indicating that capital might be preparing to return.
So you will find that the market itself is actually a process of constantly 'scaring you.' What we need to do is not to be frightened every time, but to understand: is this time really the 'wolf coming,' or is it just another 'false alarm'?
Finally, I want to say don't always fixate on price movements and panic. Ask yourself: has there been any substantial change in this project? Is the team still there? Are users still active? If all is well, then it's likely just a temporary fluctuation, and you might consider operating against market sentiment.
In short, the crypto world is like a series of plays: there are liquidations, surges, panic, and greed. But ultimately, only if you remain calm enough can you find opportunities amidst the chaos.
If you are currently experiencing a market crash, don’t rush to liquidate your positions, and don’t rush to go all in. Treat this drop as a lesson, learning to understand it might be an upgrade on your investment journey.
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