There are several reasons for a crypto dip. Since this year, cryptocurrency has had a difficult trip. Almost 60% of Bitcoin's value had been lost as of November 18, and other cryptocurrencies have also lost ground. Ethereum (ETH) and Binance Coin (BNB), two altcoins, have decreased by around 55%. It’s easy to wonder if it’ll ever recover.
Although 2022 has shown that cryptocurrencies are inherently volatile, were crypto investors prepared for the unexpected crypto crash?
Since cryptocurrency has previously experienced a significant decline, this is nothing new to us. The price of cryptocurrencies fell significantly in May 2021. The value of bitcoin decreased by more than 45%. Many cryptocurrency investors remained interested in cryptocurrencies despite the decline.
Despite the fact that a number of businesses and nations have begun to accept cryptocurrencies as legal tender, the cryptocurrency market has continued to decline. What might be the root of the crypto dip?
Top 5 Reasons Why Crypto Crashes
Many traders are starting to wonder what the causes of cryptocurrency dips are as investors become demoralised by the recent crypto meltdown. Here are the top 5 causes of cryptocurrency crashes:
- Cryptocurrency Investors Are Taking Too Much Leverage
As of January 2022, a BTC leverage ratio published by CryptoQuant indicated that many investors were taking risks in the cryptocurrency market. similar to traditional markets where investors may finance future purchases using debt. A significant risk is involved because it is uncertain if the investment will be profitable. Cryptocurrency is a volatile asset, so it makes sense for investors who borrowed money to buy it to panic over even the smallest decline. Many of these investors will eventually withdraw their funds once there is a decline because they are afraid they will not be able to pay their debts. This cycle resembles the stock market's movements in 1929 and 2008.
These kinds of catastrophes are incredibly unfair to markets, such as those with limited liquidity.
- Lack Of Liquidity In Cryptocurrency
When leveraged investors sell their bitcoin holdings, it is one of the largest issues the crypto market has to deal with. It is inevitable for the market to be crushed when a large share of assets is removed from it. This frequently happens when the value of a cryptocurrency somewhat drops, causing the holders to start selling off their holdings out of panic. When a whale—someone possessing a considerable amount of cryptocurrency—sells a sizable amount of it, the market floods due to this activity. It can be said for the recent fall of FTX.
- Cryptocurrency Regulations
In general, the price of cryptocurrencies may decrease when governments outlaw crypto mining, crypto trading, or any other crypto-related activity. When China forbade cryptocurrency mining in June 2021, miners were forced to relocate to miner-friendly locations elsewhere. The hash rate of the network decreased as a result. As can be seen, the hash rate decreases when prices decrease and vice versa. It will also be challenging for miners to create the coins they are mining when hash rates fall.
- Crypto Influencers Can Cause Crypto Volatility
Investors in cryptocurrencies need to be aware that prominent influencers and crypto enthusiasts can tweet about a money inflow. This has been evident several times when Elon Musk backed dogecoin, and its price increased. The outcome could be the same, but it might be detrimental this time.
This is brought on by the lack of liquidity in the crypto space and the value of asset classes based on investor sentiments. Any coin that receives negative press from a major influencer will start to lose value within a few hours of the comment.
- Crypto Security Breaches Triggers Fear
Other elements that could contribute to a crypto bear market include blockchain technology and network security. For instance, when cryptocurrency investors learn that a crypto coin like ETH has a security weakness, they may decide not to mine the coin but to sell it instead. The hash rates and overall price decrease as a result of these actions. The most recent Terra Luna currency fall serves as a good real-world illustration.
Conclusion
These are some of the main factors behind the crypto drop. To avoid losing money when rapid crypto crashes occur, investors must be well-informed about the market and grasp the inflow and outflow of prices. because cryptocurrency collapses are inevitable, given that the market is unstable. Do Your Own Research (DYOR), which is more important.
This article was written in cooperation with Davis Jackson