Six key reasons for “Crypto Crash”

Six key reasons for “Crypto Crash”

May 16, 2022 by Diana Ambolis
Large quantities of money have been lost in recent bitcoin market downturns. Cryptocurrency has had a horrible start to the year. As of May 12, Bitcoin (BTC) had lost about 40% of its value, while Ethereum (ETH) and Binance Coin (BNB) had both lost nearly 50%. These are the three most valuable cryptocurrencies by market
Six key reasons for "Crypto Crash"

Large quantities of money have been lost in recent bitcoin market downturns.

Cryptocurrency has had a horrible start to the year. As of May 12, Bitcoin (BTC) had lost about 40% of its value, while Ethereum (ETH) and Binance Coin (BNB) had both lost nearly 50%. These are the three most valuable cryptocurrencies by market capitalization, excluding US dollar-backed stablecoins like Tether (USDT) and USD Coin (USDC). From mid-May to mid-July 2021, cryptos had yet another massive drop, with Bitcoin plunging by more than 45 percent. Even after all the volatility, investors are very keen on cryptocurrencies. As per Vin Narayanan, vice president of strategy at Early Investing, “as crypto use grows, it will become more stable.” Until then, investors should be aware of what to watch for to avoid being victimized by bitcoin price drops. Six reasons why cryptocurrencies fail are listed below.

Cryptocurrency investors are taking on much too much risk.

Crypto analytics firm CryptoQuant’s BTC leverage ratio hit all-time highs in early January, showing that more investors were willing to take on risk in the crypto market. Crypto speculators will regularly use loans to fund future purchases, just as they do in traditional markets. Miners can use this to hedge against any price drops in the coins they’re mining. According to Simon Peters, “Price decreases could cause the liquidation of long-term assets in any asset class,” Peters claims. When futures holders dump their contracts when prices fall, prices may fall even further. It’s a recurrence of the 1929 and 2008 stock market crashes. Cryptocurrencies, for example, are particularly vulnerable to such crashes since they have limited liquidity.

There is a scarcity of liquidity in bitcoin markets.

The fundamental challenge that the crypto markets face when leveraged investors liquidate a large portion of their holdings is general liquidity. Unlike the stock market, unsold coins are not always surrounded by eager purchasers. When a large number of coins are sold, fewer people want to buy them. Narayanan claims that “This is why giant corporations cannot trade little coins. They ultimately result in market instability.” When a whale — an investor with a significant position in a certain asset — sells large amounts of cryptocurrencies, the market may be flooded. The coins just flow into the market, creating a supply glut and low demand.

Cryptocurrencies are regulated.

When China stopped crypto mining in June 2021, “miners had to move to other jurisdictions that were more miner-friendly,” Peters notes. According to the repercussions for crypto investors, “we noticed a significant decline in the network hash rate.” In the crypto industry, a hash rate is the number of calculations that can be executed per second. Because these computations allow miners to make the coins they’re mining, they have an impact on the price of a coin. The hash rate decreases as costs decrease. It has been suggested that the inverse is also true. This is owing to the fact that miners are frequently paid in cryptocurrencies. However, if governments impose mining restrictions, the overall price of cryptos could tumble.

Also, read – What does the crypto crash indicate for the investors?

Concerns about crypto security breaches.

Other factors that could cause a crypto crash, according to Peters, include blockchain security. Such disasters would follow the same pattern as government-caused regulatory disruptions. If it appeared that Bitcoin had a security flaw, for example, miners would be less motivated to mine it, decreasing the hash rate and overall price. “This is a completely new asset class,” Narayanan explains. “There will always be a finite supply of Bitcoin.” Unlike stocks, which contain underlying assets, most cryptocurrencies’ value is purely determined by market sentiment. “For cryptocurrency investors, the challenge is to find ones with limited supply and long-term appeal,” says Dan Kemp, global head investment officer at Morningstar Investment Management.

Also, read – Why are hackers taking advantage of the Blockchain Bridges Problem?

Crypto influencers are the source of volatility.

Peters reminds cryptocurrency investors that “crypto fans and key influencers can tweet and induce a capital influx when it comes to sentiment.” Elon Musk’s support for Dogecoin is one example of this. Tweeting has the potential to be harmful. This is because the value of this asset class is influenced by investor sentiment as well as the lack of liquidity in the crypto market. Stablecoins could be a solution to this problem for investors. Traders can use this type of coin to simply shift in and out of other crypto positions as the market swings.

Correlations between the stock market and cryptocurrencies.

Part of the appeal of cryptocurrency is that it should be an uncorrelated asset. It should be free to travel about the market, to put it another way. This isn’t always the case, as the year 2022 demonstrated. “Crypto markets have been more linked to traditional markets in recent years as a result of traditional acceptability. Some people believe there is a strong link between cryptocurrency and the stock market, “Peters concurs. Crypto, which was once supposed to be the world’s newest hedge against interest rates and inflation, is proving to be far more linked to general markets than early adopters expected. Consider the crypto market’s 45.3 percent year-to-date collapse through May 12 compared to the S& P 500’s 17.5 percent decline. The fact that this decrease occurs at the same time that interest rates rise does not indicate that the two are unrelated. Narayanan claims that “crypto collapses are part of investing in crypto.” Investors must consider both the length of time they plan to keep digital assets and their ability to weather the market down.

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