Recent Bitcoin Downturns Have Destroyed Huge Sums Of Money
The cryptocurrency market has struggled to get off to a good start this year. On May 12, Bitcoin (BTC) was down about 40% year to date, while Ethereum (ETH) and Binance Coin (BNB) were down around 48% and 47%, respectively. Excluding stablecoins like Tether (USDT) and USD Coin (USDC), designed to be pegged to the U.S. dollar, these are the three most valuable cryptocurrencies currently in circulation.
The price of crypto has fallen before, so this is not unprecedented. Bitcoin lost more than 45% of its value between the middle of May and the middle of July 2021. This was the second major decline that cryptocurrencies experienced.
Many investors are willing to risk the cryptocurrency market’s Volatility to make a profit. “As crypto use develops, it will become more stable,” said Early Investing’s vice president of strategy Vin Narayanan. However, until then, investors need to know what to watch out for to avoid being burnt in the inevitable crypto market meltdown. Here are the top six causes of cryptocurrency market crashes.
Investors in cryptocurrencies using excessive leverage
In early January, CryptoQuant’s BTC leverage ratio reached record highs, indicating record levels of risk-taking by cryptocurrency investors. Like those in more conventional markets, cryptocurrency investors sometimes rely on loans to make large futures transactions. Mining pools may use this to protect themselves against a reduction in the value of the coins they’re mining. These high levels of leverage “may imply instability in the short future,” according to Simon Peters, senior account manager at eToro.
Peters adds that “price drops might prompt liquidation of long-term investments” in any asset class. Then, if futures traders start selling off their holdings as prices fall, the market might see more declines. It’s a pattern reminiscent of the stock market crashes of 1929 and 2008. But for illiquid markets like bitcoin, these collapses may be disastrous.
Markets for cryptocurrencies lack liquidity
When investors who have taken on excessive debt sell off a major amount of their crypto holdings, the greatest risk is that market liquidity may dry up. The stock market isn’t the only place where eager bidders may snap up freshly dumped coins. For these and other reasons, cryptocurrency exchanges often experience downtime on Fridays, Saturdays, and Sundays. When many coins are traded, fewer buyers are on the market.
As Narayanan puts it, “That’s why major banks can’t deal in coin sizes below one cent. The stock markets usually react negatively to them.” For instance, the market might become oversaturated when a “whale” (an investor with a high holding in a certain asset) sells a substantial quantity of cryptocurrency. The coins flooded the market, leaving behind an oversupply and little demand.
Regulation Of Cryptocurrency
“Miners had to relocate to other countries that were more miner-friendly” when China outlawed cryptocurrency mining in June 2021, as Peters puts it. For crypto traders, “we noticed a huge fall in the network hash rate,” which has dire consequences. In the field of cryptography, the pace at which computations may be made per second is referred to as the “hash rate.”
The difficulty of these computations is directly related to the value of the cryptocurrency being mined since they determine whether or not a certain number of miners can successfully create that number of coins. A decrease in hash rate might be expected with a fall in pricing. However, it has been hypothesized that the converse is also true. This is often the case since miners are compensated in bitcoin. This also implies that the total price of cryptocurrencies might decrease when governments clamp down on mining via laws. Briansclub has all the cryptocurrencies and tokens on its website.
Crypto security breaches are creating Concern
Peters cites concerns about blockchain and network security as other potential causes of a crypto market catastrophe. The dynamics of such a collapse would be quite similar to the effects of regulatory disruptions caused by governments. For instance, if rumors spread that Bitcoin had a security hole, miners may lose interest, lowering the hash rate and perhaps driving the price down. According to Narayanan, “this is a new asset class.” “The total number of Bitcoin in circulation is capped at 21 million.”
The value of most cryptocurrencies is determined entirely by investor emotion, in contrast to equities backed by actual assets. Dan Kemp, global chief investment officer at Morningstar Investment Management, says, “the issue for investors who aspire to own cryptocurrencies is to locate those that have limited supply and sustained appeal.”
Crypto influencers cause Volatility
To Peters’ point, “crypto enthusiasts and significant influencers may tweet and create a flood of cash,” investors in cryptocurrencies should keep this in mind when considering the impact of mood. As we can all see, this is exactly what happened when Elon Musk backed the cryptocurrency known as Dogecoin.
The converse is also true; tweeting may make you feel lonely. This asset class’s value depends on investors’ emotions since cryptocurrencies are notoriously illiquid. Stablecoins are a potential solution for this issue for investors. With this currency, investors may quickly enter and exit the market for other cryptocurrencies in response to price fluctuations.
Connections between cryptocurrency and stock markets
Cryptocurrencies’ potential independence from one another is one of their greatest attractions. It has to be allowed to float independently of the rest of the market. However, as the year 2022 has shown, this is only sometimes the case. “As conventional acceptance of cryptocurrencies has increased over the last few years, the two sets of markets have grown more interwoven. Some believe that crypto has a strong link to the stock market, “Peters explains.
However, crypto has become far more market-correlated than its early users had planned. As of May 12, the value of all cryptocurrencies had dropped by 45.3% year-to-date, compared to a 17.5% drop in the S&P 500. The fact that this drop coincides with rate hikes doesn’t assist the argument that they are unrelated. Yet, as Narayanan points out, “Crypto collapses are part of investing in crypto.” Traders should think about how long they can afford to retain digital assets and how well they can weather market fluctuations. Traders should also use platforms like briansclub for investing in cryptocurrencies.