The crypto industry can provide people with success, security, and profit, but it can’t promise stability. Most cryptocurrencies are volatile by nature and are subject to fairly frequent crashes. Even the biggest cryptos, like Bitcoin, have suffered crashes, but why exactly is this the case?
Why are cryptos so volatile, and what causes them to crash?
Why Are Cryptocurrencies So Volatile?
Cryptocurrencies are virtual assets, the majority of which are not backed by any physical asset or government assurance. This means that there is no consistently valuable asset that cryptocurrencies are supported by. The exception to this rule is stablecoins, coins that are often backed by a traditional tender or physical asset. But most cryptos do not fall under this category.
So, if cryptocurrencies are so volatile, what factors are they affected by?
What Causes Cryptos to Crash?
A range of different factors can influence the price of any given crypto. Let’s look at Bitcoin’s previous crashes to understand how cryptos can be influenced in different ways.
Bitcoin has seen its fair share of highs and lows since the crypto boom in 2020. Bitcoin has reached new heights, even managing to hit a price of just under $70,000 in November 2021. But these kinds of exponential price hikes don’t tend to last in the crypto industry, and Bitcoin’s price began falling shortly after it reached this peak.
But this price drop continued past what was expected at the start of 2022, falling below $40,000 in January. It is thought that this drop was triggered by rumors that the U.S would begin more tightly regulating digital assets, which gave many investors cold feet. When a large number of investors decide to offload their crypto, demand drops, and so does the price.
Bitcoin’s price drop increased in severity in May 2022, after the stock market crashed and Terra Luna and TerraUSD crashed and lost almost all of their value. To the dismay of investors around the world, Bitcoin fell below $30,000, causing huge financial losses.
But Bitcoin is no stranger to crashes. Though it is a hugely popular crypto, its price has been affected by the smallest of events. Even Elon Musk’s announcement that Tesla would no longer accept Bitcoin caused a big market dip in May 2021.
Of course, price crashes are not exclusive to Bitcoin. All cryptocurrencies that aren’t pegged to a traditional asset can suffer from big drops in value. So, what other factors can cause this?
What Other Factors Cause Crypto Crashes?
Crypto whales can play a big role in the state of a coin’s value. These are individuals or groups with huge crypto holdings that range in the millions or billions. When an entity has such mammoth holdings, selling off big chunks of crypto or buying more assets can affect the supply/demand dynamic that has such a big influence on crypto prices.
Let’s say a crypto whale sells off $100 million in Ethereum in one go. This would significantly lower the demand for ETH and have a knock-on effect on the price. Sometimes whale activity causes small dips or hikes; sometimes, they can cause total crashes.
Additionally, global crises can also cause big waves in the crypto industry. Take the COVID-19 pandemic, for example. When the pandemic first took hold, Bitcoin took a pretty big hit, dropping from $9,000 to $5,000 in March 2020. Other cryptos suffered a similar dip. The stock market also took a huge blow at this time, as businesses around the world had to partially or totally close due to lockdowns.
Crypto crashes can also be caused when decentralized projects fail. Let’s say a crypto lending platform with its own native token has to shut down due to low profits. This will cause an immediate crash in the native token’s value, likely to zero. Additionally, changing crypto laws can also affect the market. If a big country were to ban crypto trading or mining, for example, this would likely cause a market dip.
Crypto Is Volatile and Fragile by Nature
Because crypto prices are so dependent on ever-changing factors, there are, unfortunately, no guarantees that can be made for investors in terms of profit. Risk is often the name of the game in crypto, and there’s really no knowing where a coin’s price will go next.
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