The cryptocurrency industry can provide people with success, security, and profits, but it cannot promise stability. Most cryptocurrencies are volatile in nature and crash frequently. Even the biggest cryptocurrencies, like Bitcoin, have had problems, but why exactly is this the case?
Why are cryptocurrencies volatile and what caused them to crash?
Why are cryptocurrencies so volatile?
Cryptocurrencies are virtual assets, the majority of which are not backed by any physical assets or government guarantees. This means that there is no single asset with a consistent value for which the cryptocurrency is supported. The exception to this rule is stablecoins, which are typically backed by traditional tenders or physical assets. But most cryptocurrencies do not fall into this category.
So, if cryptocurrencies are so volatile, what factors will they be affected by?
What causes Cryptos to crash?
A variety of different factors can affect the price of any given cryptocurrency. Let’s look at Bitcoin’s past crashes to understand how the cryptocurrency can be affected in different ways.
Bitcoin has seen reasonable highs and lows since the crypto boom in 2020. Bitcoin has reached new heights, possibly even hitting a price of just under $70,000 by November 2021. But these exponential price rallies don’t tend to last in the crypto industry, and the Bitcoin price started to fall shortly after it reached this peak.
But this price drop continued beyond what was expected in early 2022, falling below $40,000 in January. It is thought that this drop was triggered by rumors that the US would start to more strictly regulate digital assets, which has left many investors cold feet. When a large number of investors decide to sell their cryptocurrencies, the demand decreases and so does the price.
Bitcoin’s price drop became more severe in May 2022, after the stock market crashed and Terra Luna and TerraUSD crashed and lost almost all of their value. To the disappointment of investors around the world, Bitcoin fell below $30,000, causing massive financial losses.
But Bitcoin is no stranger to crashes. Although it is an extremely popular cryptocurrency, its price has been affected by the smallest events. Even Elon Musk’s announcement that Tesla would no longer accept Bitcoin caused a massive drop in the market in May 2021.
Of course, the price drop is not exclusive to Bitcoin. All cryptocurrencies that are not tied to traditional assets are subject to a massive drop in value. So, what other factors could be causing this?
What other factors cause crypto crashes?
Cryptocurrency whales can play a big role in the coin’s value state. These are individuals or groups with huge crypto holdings in the millions or billions. When an entity has such a huge holding, selling off large volumes of cryptocurrencies or buying more assets can affect supply/demand dynamics that have a major influence on crypto prices.
Let’s say a crypto whale sells off $100 million worth of Ethereum in one go. This will significantly reduce the demand for ETH and have an impact on the price. Sometimes whale activity causes small drops or long hikes; sometimes, they can cause the whole problem.
In addition, global crises can also cause big waves in the crypto industry. Take for example the COVID-19 pandemic. When the pandemic first took hold, Bitcoin took a pretty big hit, falling from $9,000 to $5,000 in March 2020. Other cryptocurrencies suffered a similar drop. The stock market also suffered a major blow at this time, as businesses around the world had to partially or completely shut down due to closures.
Cryptocurrency crashes can also be caused when decentralized projects fail. Let’s say a crypto lending platform with its own native token has to close down due to low profitability. This will cause an immediate crash in the value of the original token, potentially zero. In addition, changing crypto laws could affect the market as well. For example, if a large country bans cryptocurrency trading or mining, this could cause a market drop.
Cryptocurrencies are naturally volatile and fragile
Because cryptocurrency prices are highly dependent on ever-changing factors, unfortunately no guarantees can be made to investors regarding returns. Risk is often the name of the game in crypto and there really is no telling where the price of a coin will go next.
How Elon Musk caused the price of Dogecoin to skyrocket
https://www.makeuseof.com/why-is-crypto-going-down-what-causes-bitcoin-crash/ Why Is Bitcoin Going Down? What Causes Crypto to Fall in Value?