Cryptocurrencies have had a rough start; as of May this year, some of the biggest cryptocurrencies lost at least 40 percent of their value. And this is not the first time crypto has dropped. Between mid-May and mid-July last year, cryptocurrencies went through yet another big drop. Despite these volatilities, many more investors are more optimistic about cryptocurrencies and are willing to invest.
Many investors believe that cryptocurrency adoption by institutions will make it more stable. However, until then, investors need to take a closer look at cryptocurrencies before investing so they don’t suffer losses.
This article discusses why is crypto crashing and whether it is still a good investment.
Crypto Investors Are Leveraging Too Much
Data from crypto firms shows that the leverage ratio continues to hit highs from the beginning of the year. This means that investors are taking more risks in the crypto space, and just like traditional markets, investors in crypto use debt to finance their future purchases. This leads to price drops in the crypto they are mining and explains why is crypto crashing.
As with all assets, liquidation of longer-term positions causes the price to decline. As this decline continues, even the future holders begin liquidating their positions which causes a further fall in prices. It is a similar case to what happened with the stock market between the years 1929 and 2008. However, such incidences are even more dangerous in crypto markets because they don’t have higher liquidity than stocks.
Regulations On Cryptocurrency
When nations like China banned cryptocurrency mining, miners had to move to other, more friendly investments. And the implication to crypto investors was a drop in hash rate- the number of calculations that can be performed every second. Now, these calculations are the ones that allow the miners to produce the coins they are mining and also affect the price of the coin.
Breaches in Crypto Security Are Causing Fear
Network security and blockchain are yet another answer to your question on why is crypto crashing. Such security breaches may unfold regulatory disruptions from government actors. A security flaw in a certain coin would affect the desire to mine it, affecting the hash rate and its overall price. To avoid this, investors are advised to hold on to cryptocurrencies with an enduring appeal and limited supply.
Cryptocurrency Influencers Are Causing Volatility
The sentiments of cryptocurrency influencers and social media advocates can cause a huge capital inflow. When many influencers support certain crypto, they may negatively affect their returns. Because of the cryptocurrency’s lack of liquidity, for investors to avoid this problem, they should invest in a more stable coin.
In recent times crypto has been crushing; it’s, therefore, advisable to invest in a more stable coin. Some of the reasons causing this decline include; cryptocurrency investors leveraging too much, regulations on cryptocurrency in some countries, and fears caused by breaches in crypto security. Crypto influencers and advocates are also major causes of this volatility.