By Mark Hulbert
No investment is immune to sharp, painful downturns
October has lived up to its reputation as the month when crashes occur. Except the crash this time was in bitcoin (BTCUSD) rather than the stock market.
At one point this past Sunday, bitcoin was 15.4% below its all-time high set just a couple of days earlier. That certainly qualifies as a crash; it’s larger than the 1929 crash, when the Dow Jones Industrials Average DJIA fell 12.8%.
Many crypto enthusiasts are shocked by this drop, going to great lengths to dismiss it as a one-time event caused by idiosyncratic factors. But they are on a fool’s errand: Crashes are an inevitable feature of not just the stock market but the crypto marketplace as well.
That’s the implication of a theory developed several decades ago that was published in a 2002 letter to the scientific journal Nature – hardly where you’d expect to read about a theoretical breakthrough about market crashes. Entitled “A theory of power-law distributions in financial market fluctuations,” the researchers found that the frequency and magnitude of market crashes “are similar for different types and sizes of markets, for different market trends and even for different countries – suggesting that a generic theoretical basis may underlie these phenomena.”
In other words, crashes are inherent to the financial markets. The source of crashes’ ubiquity is that each market inevitably will be dominated by its largest participants. And when those large investors want to sell at more or less the same time, which on occasion will be the case, prices will plunge. Regulatory efforts to prevent such plunges may postpone the carnage – but only temporarily.
The researchers’ theory puts into a new perspective the many stories that crypto enthusiasts have been telling themselves this week to avoid having to squarely face that crashes are inevitable. Consider the following narratives that are making the rounds:
— “Flash” crash: Though commentators and analysts have not bothered to define what they mean, the implication of their calling what happened over the weekend a “flash crash” is that it was not particularly serious. But that is simply an expression of their hope. All crashes are flash crashes, insofar as they involve a huge loss over a very short period of time – by definition. What kind of crash would not be a “flash crash?”
— A few “large holders”: Another comforting narrative from some crypto enthusiasts is that the initial selling wasn’t widespread, but instead was confined to a few large holders – whose selling then triggered follow-on selling pursuant to stop loss orders, from momentum traders, and so forth. But, according to the researchers, all crashes are caused by the more or less simultaneous selling of the largest participants. In this regard, bitcoin’s recent crash is no different than any other crash.
— Risk got too high: One of the more laughable explanations I read was that the selling was caused by “too many risks in the market.” But it’s precisely the belief that such risks exist that occasionally cause large holders to sell. It’s been forever thus. Once again, in this regard bitcoin’s crash is no different than any other crash.
The bottom line: Crashes are as inevitable in the crypto arena as they are for the stock market. We had better get used to it.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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Plus: Friday’s selloff broke something in the stock market. Here’s what that means for investors.
-Mark Hulbert
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10-18-25 0958ET
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