Cryptocurrencies are one of the most volatile assets in the world, meaning they are prone to sudden price drops and ups. Sometimes, these price drops can be drastic, causing a huge frenzy among investors and traders. In such a case, you might end up with huge losses. That’s why we are bringing this article to you.
It explores the crypto market crash concept, the driving factors behind these crashes, and how you can effectively navigate through these crashes and mitigate the risks associated with them.
What is a Crypto Market Crash?
A cryptocurrency crash is a phenomenon in the market where the price of one or more cryptocurrencies goes down rapidly and that too, by a huge margin. As cryptocurrencies are inherently volatile in nature, they can cause huge price swings, making them more susceptible to crashes than traditional stock markets.
Normally, crypto crashes happen in a short time frame, causing huge panic among investors and traders, and can be caused by a wide variety of things like negative news and regulatory measures. It should also be noted that the crypto market is considered to crash when its overall market cap dips by over 10%.
Factors Behind Crypto Market Crashes
Many factors can, directly and indirectly, affect the crypto market crash. Here are a few notable factors.
1. Regulatory Challenges
Regulatory challenges can lead to market crashes by creating uncertainty and fear among investors, prompting them to sell their crypto assets rapidly. This could cause the price of assets to go down rapidly and is mainly because unclear or strict regulations can deter institutional investments, and limit market liquidity, making it extremely difficult for crypto businesses to operate.
2. Technical Factors
Technical can trigger a crypto crash by causing massive selling pressure. This is caused due to automated trading algorithms, high-frequency trading, margin calls, and liquidation events, which can result in rapid price swings, especially during high volatility periods, causing a rapid decline in the market value of various crypto assets.
3. Global Economic Factors
Global economic factors like rising interest rates, inflation, and macroeconomic stability can be termed the key factors that could result in a crypto crash. Central banks, particularly the Federal Reserve have increased their interest rates by a considerable margin to combat inflation, prompting investors to choose them over volatile cryptocurrencies. Because of this, the inflows into the crypto market reduced significantly, leading to sharp price declines.
4. Correlation of Stock & Crypto Market
As years pass by, the crypto market is getting more and more related to the traditional stock market. With this growing correlation, the crypto market is going down each time the stock market experiences a dip. This is mainly due to the large-scale institutional investors in both the marketplace. As these investors keep adjusting their portfolios to minimize the risks, these actions lead to simultaneous price declines on both fronts.
5. Market Speculation & Sentiment
The crypto market has become increasingly susceptible to speculation and investor sentiment nowadays. It all started in 2011 when the market was flooded with new crypto investors driven by their fear of missing out, which soon turned into a rapid sell-off causing a rapid crash.
6. Key Project & Exchange Collapses
The failure of key projects and exchanges can significantly impact market sentiment and investor confidence. These high-profile collapses and bankruptcies of major exchanges can erode the trust of potential investors and traders, inadvertently leading to broader market sell-offs causing a potential crash in the crypto market.
How To Effectively Navigate Crypto Crashes?
If you’re wondering what to do in case of a crypto market crash, here are some of the things you should consider doing.
1. Staying Calm
During a crypto crash, the most important thing you need to do is keep a cool head. It doesn’t matter whether you decide to sell your crypto or use the dip as an opportunity to buy more. If you make emotional decisions during such scenarios, you will definitely be handed a losing hand. So, before the panic rushes in, remember why you invested:
- Is it for the long-term potential of the project?
- Or to make a quick profit from short-term trading?
Finding the answer to these questions can greatly help in making proper decisions and can prevent you from making emotional and rash trading decisions.
2. Assessing The Situaiton
When the crypto market crashes, you need to look for answers as to why it is crashing. It may be due to some negative news or other regulatory developments in the market. For instance, in 2017, it was due to China banning exchanges, and in 2021, it was due to the regulatory measures put on various financial institutions. So, before making any decision, take your time to evaluate the situation in the market.
3. Take In Account The Volatility Of The Crypto Market
Cryptocurrencies are inherently volatile in nature. As crypto doesn’t bring in cash flows, traders and investors depend on the market sentiment to make a profit from it. This could cause the price to go up and down rapidly in a specific time frame. For instance, in 2021, the crypto market shot up greatly only for it to crash a few months later. These ups and downs drive the traders to join the crypto market, so try not to panic every time the market crashes.
4. Evaluate The Future
Most cryptocurrencies are used as a store of value rather than being replaced by fiat currencies. So, evaluate how the crash will play out in the market and see if the market can shoot up. You can also check the future developments planned for a crypto project that could drive its market adoption. Take in all these facts before making a decision.
5. Taking Action
After you cooled down and assessed the situation in the market, it is now time to take action. There are mainly 3 potential possibilities in front of you.
- If you see an opportunity in disguise in this sudden dip, hold your asset and try to buy more at a low price.
- If the results from the assessment depict a further worsening state, take your loss and postpone investing until the market goes on track again.
- However, if the future of the investment can’t be comprehended, sell some portion of it to profit now and keep some in case, the price goes up gain.
Whichever way you decide to go, make sure to have a clear and logical goal in front of you.
Final Remarks
Plunges or crashes in the crypto market are quite common. This sudden and drastic drop may leave you rattled. However, if you make emotional decisions prone to these crashes, you might end up losing your capital. So, use these crashes as a wake-up call to reassess the situation in the market and choose a strategy that has the most probability of being beneficial to you. For further insights into the crypto market, stay tuned.
