Why Does Crypto Crash? The Mechanics Behind Three Real Collapses

12 March 2020: Bitcoin starts the day near $8,000, and within about a day it is trading under $4,000, half the value of the biggest coin in the world gone between one breakfast and the next, while COVID panic emptied every market on earth. Traders still call it Black Thursday, and they say it the way you mention a car crash you walked away from.

The lazy read is that crypto just does this, random, like weather. Except the crashes have mechanics, the mechanics repeat, and the same parts turn up in three real collapses: that COVID day, Terra folding in May 2022, FTX going down that November. What follows describes how the machine behaves, it is not financial advice, and it predicts nothing.

No closing bell, no brakes, and rather a lot of borrowed money

Stock markets carry brakes: when US shares fell hard in March 2020, circuit breakers halted trading four times in ten days and forced everyone to breathe for fifteen minutes. Crypto has no such switch, it trades 24 hours a day, seven days a week, everywhere at once, and no exchange, government or protocol can call a timeout for the whole market.

None.

So a panic that starts during Asian hours rolls through Europe and into New York without a break, selling feeding selling all night, and that one design fact sits underneath every crash in this piece. Then add the second ingredient: plenty of traders do not stop at buying coins, they borrow against their position to buy more.

Lovely on the way up.

On the way down it turns mechanical: fall far enough and the platform force-sells the collateral to repay the loan. That sale is a liquidation, and the trader gets no vote. Now stack thousands of borrowed positions on top of each other in a market with no off switch. A falling price wipes out the first tier, the forced selling from those liquidations pushes prices lower still, and the lower price trips the tier below, which sells, which trips the next. A dip becomes a cascade, and nobody can ring a bell to stop it.

Black Thursday ran on exactly this: COVID supplied the shove, borrowed money did the rest, and mass liquidations sold into a market that was already falling. That is how bitcoin halves in a day: forced selling into a fall, with nothing anywhere to pause the panic.

The stablecoin that came unstuck

Some crashes arrive from outside, others begin when a part of the machine snaps, and Terra was the second kind. TerraUSD, called UST, was a stablecoin designed to hold $1 by algorithm rather than by a reserve of actual dollars, its peg leaning on a mint-and-burn arrangement with a sister coin, LUNA. In early May 2022 the peg slipped and holders bolted. The mechanism that was supposed to restore the dollar responded by printing floods of new LUNA into a market that was already collapsing, which crushed LUNA and broke the peg further still, a death spiral in the plainest sense. Nobody hacked anything, the design failed under load, and the load was ordinary panic. Between 9 and 13 May 2022, roughly $40bn of paper value evaporated.

One week.

And Terra did not fall alone, because crypto firms lend to each other the way banks do. Contagion is the dull banking word for what came next, and the bill kept circulating for months. Funds that had borrowed heavily against Terra-linked positions could not repay: Three Arrows Capital, then one of the sector's biggest funds, collapsed in mid-2022, and lenders including Celsius froze withdrawals and followed it down. Each estate then sold whatever coins it still held to pay creditors, dumping supply into a market already sinking.

When the exchange itself dies

FTX was one of the largest crypto exchanges on the planet, and on 11 November 2022 it filed for bankruptcy after a run on withdrawals revealed that customer funds were missing, not misplaced, missing. Prices sank across the board, and bitcoin touched around $15,500 that month, the low of the entire cycle.

The harder lesson landed on FTX customers specifically. People whose coins sat on the exchange learned that 'the market is down' and 'my coins are gone' are different problems: the first ends when prices move, the second drags through bankruptcy court for years, if it ends at all. Where your coins live decides which of those two problems can reach you, which is why self-custody, keeping coins in a wallet where only you hold the keys, gets discussed every time an exchange dies.

Governments and the price of money

Two more levers, briefly: China banned crypto mining and squeezed trading in May and June 2021, prices fell sharply and much of the mining industry physically left the country within months. And through 2022, as central banks raised rates, bitcoin traded less like digital gold and more like a risk asset, sliding alongside tech stocks month after month. No scandal required, just money getting more expensive everywhere while speculative assets deflated together.

What the record shows afterwards

The historical record, dates attached: after March 2020, bitcoin went on to new highs in 2021. After Terra and FTX dragged it to around $15,500 in November 2022, it crossed $100,000 in December 2024. Every crash named here was followed, years later, by prices above the old peak. So far. All of which is history rather than a promise: past recoveries prove such a thing is possible, and nobody anywhere knows whether the next one arrives, on what schedule, or from what depth.

Anyone claiming certainty either way is selling something.

Living with an asset that does this

Volatility is the baseline behaviour of a young, borderless market that never closes. Every mechanism above remains in place today: borrowed money, interlinked firms, designs that can snap, humans who panic at 3am.

Even the plumbing has to price that in. Quotes move while a payment clears, so an on-ramp such as Banxa, running fiat-to-crypto rails since 2014 with 100-plus payment methods in the markets it serves, locks your quoted price for roughly 3 minutes at checkout. That number exists because this market will not sit still much longer than that.

None of this settles whether crypto suits you, it shows what the ride does. A crash of some flavour has turned up every few years so far. Read the three cases again and decide what your stomach can carry. No article can do that part.