May 25

Crypto Crash Explained

The stock market is in free fall, and it appears that cryptocurrency, which was rocketing upwards, has lost all of its gains in a single day. Since November 2021, when it was most valuable, Bitcoin’s value has decreased by fifty percent. This has caused the collapse of the entire cryptocurrency market. 

Investors may be concerned following the precipitous declines in Terra (LUNA) and TerraUSD (UST). Who could have predicted that they would drop so quickly when both cryptocurrencies were in their “honeymoon” phase a month ago? Nevertheless, as the wave is stabilizing, the Best Online Casino still allows you to use crypto for your bets.

As negative sentiments spread throughout the cryptocurrency market, investors withdrew their funds, causing Tether (USDT) to no longer be pegged to the dollar.

Here are six causes of cryptocurrency market crashes:

Crypto Influencers Causing Volatility

When it comes to how people feel about cryptocurrencies, cryptocurrency investors need to remember that “crypto advocates and key influencers can tweet and cause a capital flow.” This is evident given that Elon Musk supports Dogecoin. Converse is also possible when tweeting.

This is because the value of this type of asset depends on how investors feel, and crypto is not very liquid. Stablecoins may provide investors with a solution to this issue. Traders can use this type of coin to quickly enter and exit other crypto positions in response to market fluctuations. 

Crypto Security Breaches Causing Fear

Blockchain and network security are two additional factors that could cause a crypto crash. This type of crash would be comparable to government-caused regulatory disruptions. 

For instance, if Bitcoin appeared to have a security flaw, fewer people would want to mine it, affecting the hash rate and price as a whole. 

This is a novel type of asset. Only a limited amount of Bitcoins will ever be created. In addition, unlike stocks, which are backed by assets, the value of the vast majority of cryptocurrencies depends solely on investor sentiment. It is difficult for investors to find cryptocurrencies with limited supply and long-term appeal.

Cryptocurrency Regulation

When China stopped allowing cryptocurrency mining in June 2021, miners were forced to move to more miner-friendly locations. Investors in cryptocurrencies should conclude the statement, and The network hash rate dropped significantly. 

A hash rate in cryptography is the number of calculations performed per second. These calculations assist miners in producing the coins they are mining and affect the price of a currency. When prices decrease, so does the hash rate. 

It has also been said that the opposite is true. Typically, this is because miners are compensated in cryptocurrency. But if governments implement regulations that make mining more complex, the price of cryptocurrencies may decline. 

Cryptocurrency Correlations with the Stock Market

A part of the allure of crypto is that it should be untethered from anything else. In other words, it should be able to rise and fall independently of the market as a whole. However, the year 2022 demonstrated that this is not always the case.

In recent years, crypto markets have become more intertwined with traditional markets as traditional markets have adopted crypto. According to some, there is a strong connection between cryptocurrencies and the stock market. 

Once upon a time, cryptocurrency was believed to be the most current protection method against interest rates and inflation. However, it has proven to be much more interconnected with global markets than early adopters believed.

Lack of Liquidity in Cryptocurrency Markets

When leveraged investors sell a significant amount of their assets, the biggest issue for the cryptocurrency markets is that the markets as a whole become less liquid. In contrast to the stock market, there are not always many buyers for unsold coins. 

This is one reason why cryptocurrency market crashes typically occur on weekends. When many coins are sold, investors are less likely to purchase more. Due to this, large institutions cannot trade small coins. 

They ultimately messed up the markets. For instance, when a “whale” (a significant investor in a particular asset) sells a large quantity of cryptocurrency, the market can become flooded. The coins flow into the market as a whole, creating an excess supply in a market with low demand.

Crypto Investors are Taking on Too Much Leverage

Early in January, CryptoQuant’s BTC leverage ratio reached all-time highs. This indicated that more investors were taking risks in the cryptocurrency market. Similar to traditional markets, crypto investors frequently borrow funds to purchase futures. 

Miners can use this to hedge against a future decline in the value of the coins they mine. This level of leverage could mean volatility shortly for cryptocurrencies. Long-term positions in any asset class may be liquidated if prices decline. 

As costs decline and futures holders sell their positions, prices may fall further. A similar cycle occurred in 1929 and 2008 on the stock market. However, these crashes are especially hazardous in markets with limited cash flow, such as the cryptocurrency market.


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