Why crypto crashes happen and what the 2022 crash shows

A crypto crash is a sharp, fast fall in prices across most of the crypto market. The clearest recent example ran from November 2021 to November 2022, when Bitcoin dropped from USD 69,000 to well below USD 16,000, a loss of more than three quarters of its value. This page explains why crypto crashes happen, walks through the 2022 case with dated figures, and shows what a crash means for your own money. It makes no forecasts and gives no advice on when to buy or sell. If you are new to the topic, start with the basics of crypto trading.

What is a crypto crash?

A crypto crash is a fall that is both large and broad. Most coins drop together, often within days or weeks. The European Central Bank blog post of 30 November 2022 gives the Bitcoin figures above.

No central bank stands behind Bitcoin, and coins you hold on an exchange are not bank deposits. Individual platforms can still pause trading or withdrawals, and in a crash some do.

Two official views help explain what drives the price. The Federal Reserve wrote in its November 2022 Financial Stability Report that speculation and risk appetite appear to be the primary driving forces of crypto asset prices. The authors of the ECB blog post, Ulrich Bindseil and Jürgen Schaaf, argued that Bitcoin's valuation rests on speculation. That is their view, not an official ECB position.

Why crypto prices fall so hard

Leverage and forced liquidations

Leverage means trading with borrowed money. When the price falls, the platform may ask for more collateral, which is called a margin call, or close the position automatically once losses reach its limit. The rules differ between platforms. That forced selling pushes the price lower, which triggers the next round of closures.

Most retail traders lose money, and leverage multiplies losses. You can read how this works in practice in our guide to how day trading crypto works.

Contagion between projects and platforms

When one large project fails, the damage spreads. After Terra collapsed in May 2022, firms with exposure to it, or with speculative bets of their own, ran into trouble, and some went bankrupt. Even Tether, a widely used stablecoin, briefly traded well below its peg to the dollar, according to the Federal Reserve.

Loss of trust and runs on exchanges

When customers fear a platform cannot pay them, they withdraw at once. In 2022 some crypto companies suspended withdrawals or halted operations, as the FDIC noted in July of that year. FTX, covered below, shows how fast a large exchange can become insolvent.

The 2022 crypto crash in numbers

Terra and LUNA

A stablecoin is a token designed to hold a fixed value, usually one US dollar. A depeg happens when its market price moves away from that value. It can be brief, as with Tether in 2022, or permanent, as with UST. TerraUSD (UST) was meant to stay at one dollar, but in May 2022 it lost the peg.

According to the Federal Reserve, UST had a market value of about USD 18 billion before its collapse, which took only days. The market value of UST and of the whole Terra blockchain, including its LUNA token, was wiped out. On 16 February 2023 the US Securities and Exchange Commission charged Terraform Labs and its founder Do Kwon with a multi-billion dollar crypto asset securities fraud. That is the charge as announced, not the latest status of the case.

FTX

On 11 November 2022 FTX, FTX US, Alameda Research and about 130 affiliated companies filed for Chapter 11 bankruptcy protection in the US, and Sam Bankman-Fried resigned as chief executive. The lesson is about custody. Coins an exchange holds for you are not in your own custody, and US deposit insurance does not cover an exchange's bankruptcy.

How far Ethereum fell

Ethereum volatility showed up in the same months as Bitcoin's. The Federal Reserve's chart data show Ether's market value at about USD 565 billion in November 2021 and about USD 118 billion in June 2022, a fall of roughly 79%. These are approximate values read from the report's charts.

Over the same period, Bitcoin's price fell from USD 69,000 in November 2021 to USD 17,000 by mid-June 2022, about three quarters. One figure is a market value and the other is a price, so the comparison is rough. Ethereum is not a safer version of Bitcoin: over these months it fell at least as far.

What a crypto crash means for your money

United States. The FDIC's fact sheet of 28 July 2022 states that FDIC deposit insurance does not cover crypto assets. It also does not protect you if a crypto custodian, exchange, broker or wallet provider defaults, becomes insolvent or goes bankrupt. Some crypto companies wrongly told customers their products were FDIC insured.

United Kingdom. The Financial Conduct Authority says in a research note that investing in crypto remains unregulated and high risk, and that you should be prepared to lose all your money. In practice that means you have no protection to count on if prices fall or a platform fails. In August 2024, 12% of UK adults, about 7 million people, owned crypto.

You can reduce exchange risk by keeping coins in your own wallet. Self custody removes the exchange's bankruptcy risk for those coins, but it adds a risk of its own. If you lose the keys and the recovery phrase, the coins are gone for good.

How to protect yourself from the next crypto crash

Prices can fall like this again at any time, so the useful question is how much damage a crash could do to you.

• Use only money you can afford to lose entirely.
• Do not use leverage.
• Know who holds your coins. Check that the provider is registered with the relevant regulator: in the UK that is the FCA, and in the US the rules depend on the service and the state you live in, and no single registration covers everything. Registration does not protect you from price falls.
• Do not sell or buy because of social media panic or hype.
• Practise with simulated money first. That does not make trading risk free.

After crashes, scammers target people who lost money. Some promise to "recover" lost coins for a fee, and others sell a "safe" trading bot that supposedly avoids losses. Read about common crypto scams and what AI trading bots can and cannot do before you pay anyone.

Crypto crash FAQ