The crypto market has been showing mixed signals and there have been assumptions about whether the market will ever crash and never pick up. Although that is not likely to happen, let us discuss what is likely to happen in a scenario like that. As of now, the crypto markets are at all-time highs and it is not backing down or seeing any flash crashes any time soon, and even if so, these markets tend to recover quicker than socks and commodities.
Moreover, investors have to be prepared for flash crashes like these as the market is volatile. There are many measures that can be taken by the traders like setting stop losses and building a margin for the trade within a certain period. Though the market can collapse due to different reasons, these measures will prevent the investor/trader from mitigating their losses to a certain limit.
Possible Reasons for a Crypto Crash
Crypto prices can be affected due to various reasons. Exchanges and coin crashes could be one reason why the prices can fluctuate or even crash. The market can either sink or rise with high interest rates causing inflation which will eventually lead to a permanent crash if not recovered quickly.
Changes in financial laws in a country or area can affect crypto prices. When the prices fall rapidly, it compounds pressure on the market forcing more investors to sell their assets or exchange them with fiat money to prevent their losses. This, in turn, creates an even lower dip. The reason why political decisions affect the prices is because there may be liabilities or shares certain currencies hold with a certain company or business. When political decisions affect these businesses, they sell or exchange the currency in a large sum since they had stored it for save or other purposes creating a trend in the market that other investors follow when they notice.
ETF performances can also affect the prices of the market. ETF or exchange traded funds are a type of investment that groups different currencies, securities, or commodities into a fund. This could be a combination of different types of currencies, stocks, or any other assets. These funds are usually less complicated than DEXs and DeFi.
Market manipulation by spreading misleading information about the market in order to deliberately create a loophole in a fair market will affect the market prices. This misleads many market participants making the market a downtrend and creating fluctuations in a way that can get them profit.
Macroeconomic factors like interest rates and inflation also push the values down. Black swan events like COVID-19, SEC announcements, and the Terra Lune collapse can cause the market to trigger.
Changes in the market sentiment affect the overall market prices. Traders could make quick unthoughtful decisions in times of uncertainty and this leads to abrupt price movements.
Mitigating the Risk
There are only a few ways to mitigate the risk of making the losses smaller. Crypto market crashes can cause a lot of chaos among traders. This could even occur on normal days, let alone important dates like when an important financial decision is taken or elections. Stop losses is a way to lessen the loss a trader can endure. Stop loss creates a pre-determined price to sell your assets or commodities. Doing this, even if the market crashes, a limit will be set to the losses a person endures.
Maintenance of the margin is also important when it comes to managing risks. When investors want to keep their trade open and avoid being liquidated, they have to set a margin. This way, in case of a crash, the trader will get a margin call on the position at which they are and can opt whether to add funds to the account. If they think that the crash is temporary and will recover quickly, they can opt to add more funds. This can be more profitable to them than closing the position.
Where does the money go in case of a crash?
Investing in a cryptocurrency can be alluring but it has its own risks. People who invest in large sums of money could gain profit from these currencies easily but it is important to understand where the money goes and how it will benefit a person. As most traders and investors know, the currencies a trader is investing in are literally just a reward mined by a person or a piece of blockchain. The price of this reward is what is fluctuating. The money that a person is investing in, goes to the currency but where is it stored? This is the catch.
Since the blockchain is a decentralized platform, it does not have any business or intermediary backing up the transaction history or records of the investments made. All of this is stored in blocks of the blockchain where it will remain permanent. The prices of the assets are set by supply and demand. Therefore, supply and demand are directly proportional to the prices of the currencies in a market. So when a person invests in a cryptocurrency, they increase the demand and lessen the supply causing the prices to rise.
As there is no central authority to observe where the money and other funds go, this becomes a unique investment. This also means that the money is “stored” in the blockchain and there will be no way to get it back if the market crashes, there will be no proof that you invested in the currency other than what is in the blockchain and that cannot be presented anywhere else to get the funds back.
Conclusion
Now that you are familiar with how the crypto crashes work, what the risks are, and how currencies are traded, you will have an idea about where and how the money is being transferred and in case this whole platform crashes, there will be no way to get the funds back. In my opinion, the crypto market is not likely to crash any time soon. I think so because the supply and demand are never going to back down from the rate it is at now. Even if crashes could occur, the recovery will be fast enough that traders will be inclined to invest more. This way, it becomes a loop that makes the digital currency market ever-living. If you are ever thinking of investing in the crypto market, I’d suggest you go for it when you have the finances and after you have learned more than just the basics of this world. Good Luck!