Some of the reasons for the crypto market’s crash

Some of the reasons for the crypto market's crash

Cryptocurrencies are off to a rocky start this year. Despite a late surge higher, Bitcoin (BTC) had lost about 20% of its value year to date, while Ethereum (ETH) and Binance Coin (BNB) had lost about 30% and 25% of their value, respectively. These are the three most valuable cryptocurrencies in circulation, excluding the stablecoin Tether (USDT), which is pegged to the US dollar. This isn’t the first time the value of cryptocurrency has plummeted. Cryptocurrencies had another significant slump from mid-May to mid-July 2021, with Bitcoin falling by more than 45 percent. Many investors are still interested in cryptocurrencies, despite the volatility. “As crypto use develops, it’ll become more stable,” says Vin Narayanan, vice president of strategy at Early Investing. Until then, investors may want to know what to look for to avoid being burned by crypto crashes. Here are the reasons why cryptocurrencies go down in price. -Too much leverage is being taken on by cryptocurrency investors -In cryptocurrency markets, there is a scarcity of liquidity -Cryptocurrency regulation is increasingly becoming a hot subject -Security flaws in cryptography are creating concern -Volatility is being caused by cryptocurrency influencers -Correlations among both crypto and the stock market

Too much leverage is being taken on by cryptocurrency investors

The BTC leverage ratio of crypto analytics firm Crypto Quant hit all-time highs in early January, indicating that more investors are taking on risk in the crypto market. Similarly to traditional markets, crypto speculators will frequently use loans to fund futures purchases. Miners can use this to protect themselves from potential price reductions in the coins they’re mining. According to Simon Peters, senior account manager at eToro, these degrees of leverage “may portend trouble in the short future” for cryptocurrencies.

In cryptocurrency markets, there is a scarcity of liquidity

The largest challenge the crypto markets confront when leveraged investors dump a major amount of their assets is the general liquidity of the markets. Unlike the stock market, there aren’t always a swarm of buyers ready to scoop up unsold coins. This is one of the reasons why crypto crashes tend to happen on weekends. When a large number of coins are sold, fewer investors are interested in buying. “It’s why big organizations can’t trade little coins,” Narayanan argues, “because they end up disrupting the markets.” For example, when a whale — an investor who has a substantial holding of any given commodity – sells significant sums of crypto, it can flood the market. The coins just flow into the broader market, resulting in a surplus of supply and low demand.

Cryptocurrency regulation is increasingly becoming a hot subject

“Miners had to travel to other jurisdictions that were more miner-friendly,” Peters explains, when China outlawed crypto mining in June 2021. “We’ve seen a very large decrease in the network hash rate,” as shown in the report. In the crypto world, a hash rate is the amount of calculations that can be executed per second. These computations allow miners to manufacture the coins they’re mining, and they have an impact on the price of a coin. When prices fall, so does the hash rate. It’s been proposed that the opposite is also true. This is frequently due to the fact that miners get compensated in cryptocurrency. But this also means that if governments impose limitations on mining, the entire price of cryptos may fall.

Security flaws in cryptography are creating concern

Other variables that could create a crypto crash, according to Peters, are blockchain and network security. This type of disaster would follow the same pattern as regulatory interruptions caused by government actors. For example, if it looked that Bitcoin had a security weakness, it would reduce the incentive to mine it, lowering the hash rate and lowering the overall price. “This is a completely new asset class,” Narayanan explains. “There will never be more than a certain number of Bitcoin.” Unlike stocks, which are underpinned by underlying assets, the value of most cryptocurrencies is solely determined by market emotion. “For cryptocurrency investors, the challenge is to find ones with limited quantity of supply and long-term appeal,” explains Dan Kemp, global head investment executive at Morningstar Investment Management.

Volatility is being caused by cryptocurrency influencers

Peters recently warned that “crypto aficionados and big celebrities can tweet and cause a flood of cash,” as we witnessed with Elon Musk’s support for Dogecoin. Tweeting, on the other hand, can have the opposite impact. This is due to the fact that the value of this asset class is based on investor mood, as well as the lack of liquidity in crypto. Stable coins may provide an antidote to this problem for investors. As the market fluctuates, traders can utilize this form of coin to simply move in and out of other crypto positions.

Correlations among both crypto and the stock market

Cryptocurrency should be an uncorrelated asset, which is part of its appeal. In other words, it should be free to float on its own, separate from the rest of the market. However, this isn’t always the case. “Over the last few years, crypto markets have become more intertwined with regular markets as traditional acceptability has grown.” “Crypto has a high correlation to the stock market,” according to Peters, implying that the world’s youngest hedge against inflation and interest rates may be more tied to the general markets than early adopters anticipated. “Crypto collapses are part of making an investment in crypto,” Narayanan points out.