There were times when the value of cryptocurrency skyrocketed and followed up with unimaginable declines. The volatile nature of cryptocurrency has made investors curious about the underlying risks of decline and how to be vigilant about the next one.
In crypto terms, the decline of cryptocurrency value is referred to as crashing. This article highlights the crypto crash, its reasons, and when to expect the next crash.
What is Meant by a Crypto Crash?
A crypto crash refers to a huge decline in crypto investment within a short period. The volatile nature of cryptocurrency makes it difficult to predict the decline and surge in investments. When one cryptocurrency shows a pump in growth, the other cryptocurrency will show a decline like never before, causing a crash in the latter.
Reasons for a Crypto Crash
Based on the cryptocurrency involved, the reasons for a crypto crash can vary. The volatile nature of cryptocurrency is affected by various factors. The advancements in technology, government regulations, social media influence and many more intimidate the growth of cryptocurrencies, leading to a crash.
1. Utility of tokens
The value of a cryptocurrency is dependent on its tokenomic structure. The value of a cryptocurrency decreases with weak utility, less or no demand, and high supply whereas it increases with high demand, strong utility, and limited supply.
2. Government regulations
Countries following strict crypto rules and regulations discourage their citizens from investing in the platform. This will reduce the demand for cryptocurrencies and a crash later on.
3. Market manipulation
Many investors believe that crypto investment has a thriving future, and they invest more and more in the platform. However, the uncertainty in crypto platforms can break the wall created, leading to a crash.
4. Economic conditions
Political instability, increasing interest rates, unemployment, and inflation adversely affect the crypto market. The covid 19 pandemic caused a decline in the crypto market until 2022.
5. Liquidity
Recently, some cryptocurrencies experienced liquidity concerns, taking aback many traders from investing in the platform, and resulting in a downturn in the crypto market.
6. Introduction of new cryptocurrencies
There are a large number of cryptocurrencies, giving a wider opportunity for investors to choose from. New cryptocurrencies come with the latest technologies offering a higher level of security and adaptability, attracting traders. The shift in cryptocurrencies leads to a decline in investments in older alternatives, causing a crash.
7. Scalability and security concerns
Even with higher security measures, many cases of scams and hacks have been reported across the crypto platform. This in turn resulted in a shift in investment and a down of the crypto market.
8. Social media reviews
Living in a world highly influenced by social media, crypto participants invest in cryptocurrencies that have higher positive reviews and opinions and neglect others. Many people blindly believe social media reviews and start investing without checking the reality.
Warning Signs of a Crypto Crash
1. Increasing popularity of meme coins
Meme coins are the vehicle for huge investor speculation. The tremendous popularity of meme coins usually ends up with a downturn in the crypto market.
2. Increased funding rates
An investor can hold a perpetual futures contract for a lifetime but is affected by funding rates. When the perpetual futures contracts price rises above spot prices long-term traders pay normal funding fees to short-term sellers. The funding fees become very expensive when a crypto crash tends to happen.
3. Very high Relative Strength Index
A Relative Strength Index (RSI) is the relative measure of buying pressure to the relative strength of selling pressure. The RSI value lies between 0 and 100, a higher value indicates a strong uptrend. However, a very high value can signal a crash.
4. High volatility
A low volatility signals the gearing up of the market, whereas a higher volatility increases the odds of a quick downturn.
Recent Crypto Crashes
- The crypto platform has undergone declines multiple times. Bitcoin had a higher record of around $20,000 in December 2017 and witnessed a severe decline in December 2018, with a rate of $3500.
- In November 2021, Bitcoin reached the all-time highest record of around $69,000 and dropped more than 75% in the following year.
Protect Investments from Crypto Crashing
- Diversifying the portfolio
One can diversify their portfolio by investing in numerous coins apart from popular ones. This reduces the risk of a single crypto crashing and helps in gaining profits from other crypto coins.
- Invest in less popular coins
Investing in coins that are less prone to market volatility reduces the overall investment risk and provides an ability to thrive in the existing situation.
Final Thoughts
The volatile nature of crypto platforms invites a crash without any notice. Factors like government regulations, market manipulations, economic circumstances, liquidity, advancements in technology, and security concerns influence the volatility of crypto platforms.
Crypto crashes have occurred multiple times. However, they regained strength and continued to evolve with more growth. The decline and growth are two inevitable parts of crypto, protecting our investment from the impact of a crypto crash is the only thing we can do.