Why Does Crypto Crash? Top 7 Reasons

Crypto Crash: In 2018, cryptocurrencies have had a difficult start. Bitcoin (BTC) has lost about 40% of its value year to date as of May 12, while Ethereum (ETH) and Binance Coin (BNB) had each dropped by approximately 48%. These are the three most valuable cryptocurrencies currently in use, excluding stablecoins like Tether (USDT) and USD Coin (USDC), which are intended to be pegged to the dollar.

Cryptocurrency price drops have happened before. Cryptocurrencies had another significant decline from mid-May to mid-July 2021, with Bitcoin falling by more than 45%. Many investors are still drawn to cryptocurrencies despite the volatility. Vin Narayanan, vice president of strategy at Early Investing, asserts that as cryptocurrency acceptance rises, it’ll become more mainstream.

7 reasons why crypto crash:

• Crypto investors taking on too much leverage.
• Lack of liquidity in cryptocurrency markets.
• Cryptocurrency regulation.
• Crypto security breaches causing fear.
• Crypto influencers causing volatility.
• Cryptocurrency correlations with the stock market.

Crypto investors taking on too much leverage.

Early in January, the BTC leverage ratio of cryptocurrency data provider CryptoQuant reached record highs, indicating that more investors were taking on risk in the cryptocurrency market. Investors in cryptocurrencies frequently utilise debt to finance the acquisition of futures, much like in conventional markets.

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This may be a way for miners to protect themselves against any reductions in the value of the currencies they are mining. These levels of leverage, according to Simon Peters, senior account manager at eToro, “may portend turbulence in the short term” for cryptocurrencies. According to Peters, “price drops could prompt the liquidation of long-term assets” as with any asset class. Prices could then drop even more if holders of futures contracts begin to sell their bets as prices decline. It follows a cycle similar to what the stock market saw in 1929 and 2008.

Markets for cryptocurrencies lack liquidity.

The general liquidity of the markets is the largest issue the crypto markets encounter when leveraged investors sell off a significant chunk of their holdings. Contrary to the stock market, there isn’t constantly a line of eager purchasers ready to pounce on unsold coins. This explains in part why crypto crashes frequently happen on the weekends.

When a lot of coins are sold, fewer investors are interested in making a purchase. As per Narayanan, “Large institutions cannot trade little currencies because of this. In the end, they disrupt the markets.” For instance, the market may be flooded if a whale investor, who holds a sizable holding in any given asset, sells a sizable amount of cryptocurrency.

Cryptocurrency regulation.

When crypto mining was outlawed in China in June 2021, according to Peters, “miners had to travel to other jurisdictions that were more miner-friendly.” “We witnessed a considerable reduction in the network hash rate,” was the implication for cryptocurrency investors. A hash rate in the field of cryptography is the number of calculations that can be made each second.

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These computations, which have an impact on a coin’s value, are what enable the miners to create the coins they are mining. The hash rate drops as prices fall. It has also been proposed that the contrary is true. This occurs frequently because miners are compensated in cryptocurrencies. But this also implies that when governments impose restrictions on mining via legislation, the price of cryptocurrencies as a whole may fall.

Fearful crypto security breaches.

Other elements that could contribute to a crypto crash, according to Peters, include blockchain technology and network security. Similar to how regulatory interruptions caused by government actors would happen, this kind of crash would occur. For instance, if it appeared that Bitcoin had a security weakness, miners could be less inclined to work on it, which might lower the hash rate and lower the price overall. This is a brand-new asset type, claims Narayanan.

“There will only ever be a finite number of Bitcoin in existence.” And unlike stocks, which have underpinning assets to support them, the value of the majority of cryptocurrencies is solely determined by market emotion. Finding cryptocurrencies with a restricted supply and a long lifespan is difficult for investors who want to hold them.

Volatility is being caused by crypto influencers.

Investors in cryptocurrencies should be aware of sentiment, according to Peters, because “crypto supporters and significant influencers can tweet and induce an inflow of funds.” Obviously, Elon Musk’s sponsorship of Dogecoin has shown us that this can happen. The reverse outcome of tweeting is possible as well. This is a result of both crypto’s lack of liquidity and the fact that the value of this asset class depends on investor sentiment. Stablecoins could be an investment solution to this issue. As the market changes, traders can utilise this kind of coin to quickly enter and exit other crypto positions.

Links between cryptocurrencies and the stock market.

The uncorrelated nature of cryptocurrencies is one of its appeals. It should, in other words, float independently of the rest of the market. However, 2022 has shown that’s not always the case. “Because traditional markets have adopted cryptocurrencies over the past several years, they are now increasingly entwined with one another. According to some people, the stock market and cryptocurrency have a strong association “Peters explains. Cryptocurrency is proving to be much more tied to broader markets than early users had hoped, despite being formerly touted as the world’s newest hedge against interest rates and inflation. One only needs to compare the S&P 500’s 17.5% fall year to date through May 12 to the crypto market’s 45.3% decline.

Rise in interest rates

The US Federal Reserve has agreed to raise interest rates in an effort to curb inflation. According to a Wall Street Journal report, the Fed will employ an aggressive strategy to raise the cost of debt, reduce spending, and control record-high inflation. A leading recession indication is frequently considered to be the aggressive increase in interest rates.

Celcius Network

Decentralized finance company Celsius Network said on Sunday that it is blocking all cryptocurrency transactions due to “extreme market conditions.” All the cryptos fell during the massive sell-off that followed the shutdown.

The company had stated in a blog post that it was taking “this necessary move… to stabilise liquidity and operations while we take actions to preserve and protect assets.” Additionally, customers will continue to earn incentives throughout the hiatus in keeping with our promise to them.

Reuters reported that as of May 17, the company had processed loans totaling $8.2 billion, and according to its website, it had assets worth $11.8 billion. It stated that it had assets worth more than $20 billion in August of last year.

F&Q Why Does Crypto Crash?

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