Cryptocurrencies have had a poor start to the year. Some famous cryptocurrencies, such as Ethereum and Bitcoin, have lost their value since the beginning of the year, prompting fear that a crypto market crash is approaching. While the cryptocurrency market is famous for being incredibly volatile, this isn’t the first time it has suffered a significant drop.
This article will walk you through seven critical signs that indicate a potential crypto market crash. These signs can help you lower your investment’s overall risk and loss. Keep reading to learn more!
Early Cryptocurrency Market Crashes
The cryptocurrency market is highly volatile, so profits and losses are ordinary for people who have been trading cryptocurrencies for years. For instance, most crypto buffs will remember the 2018 cryptocurrency market crash, commonly referred to as the Bitcoin crash or the Great crypto crash. The magnitude of this crash was that Bitcoin, trading at $20000 in December 2017, fell to $3500 by December 2018.
Signs That the Crypto market may crash
Investing money in crypto assets can be highly advantageous for people looking to invest in longer terms. However, the price of cryptocurrencies may be influenced by various aspects including inflation, interest rates, or other macroeconomic variables impacting people’s confidence to invest.
Let’s take a look at some of these factors in detail –
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Volatility caused by influencers
Sometimes crypto enthusiasts or important influencers may tweet and induce an inflow of investments in a particular crypto coin. A prime example is Elon Musk’s tweets that had a huge impact on the market sentiment. His tweets led to an inflow of investments for Dogecoin, soaring its price. Also, when Tesla recanted from accepting bitcoin payments, it harmed the bitcoin price.
The valuation of this asset class is determined by investor sentiment and crypto’s low liquidity. Experts advise investing in a low amount of currency to quickly move in or out of various crypto holdings as the market fluctuates.
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If digital asset flows are negative
Another cause for a crypto market crisis can be that crypto investors from North America are withdrawing money from the market at an alarming rate. Sometime earlier this year, the crypto market saw a $47 million outflow.
According to a crypto-news platform, investors are also abandoning many of the most renowned currencies, such as Bitcoin. Over the previous weeks, more than $100 million of Bitcoin has been liquidated. The situation is considerably much worse for Ethereum, which has had withdrawals of more than $150 million, amounting to more than 1.2 percent of the assets managed by Ethereum.
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Regulation on cryptocurrencies
Cryptocurrency is always a subject of debate between tax authorities, regulators, and enforcement agencies. Some countries declared crypto trading legal, while others declared it illegal. Then comes the undecided ones who choose to observe the trends and pass regulations based on them. If a negative law is passed, the market sentiment becomes negative, leading to an enormous cash outflow. An excellent example is the cryptocurrency mining ban imposed by China, forcing miners to relocate to more miner-friendly states. As a result, there was a significant fall in the network hash rate as well.
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Consumer sentiment is weakening
Many investors have left the market due to the recent crypto volatility. Even though prices have improved in the previous days, the absence of strategic confidence is terrible news for the market since there is no long-term investment-driven purchase.
There still are signs indicating interest in cryptocurrency growth, which might be attributed to greater use of the technology in some eastern regions. These may result in a long-term rebound for currencies like Bitcoin, but enthusiasts warn that the market is still vulnerable to short-term crashes.
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Lack of liquidity
The general liquidity of the markets is the biggest issue that crypto markets face when leveraged investors withdraw a significant amount of their assets. There isn’t always a swarm of buyers eager to scoop up unsold coins, unlike the stock market.
It can be one of the reasons why crypto crashes tend to happen on weekends. When many coins are sold, fewer investors are interested in purchasing them.
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Crypto security flaws
Other variables contributing to a crypto market crash include blockchain and network security flaws. This type of disaster would play out similar to regulatory interruptions caused by government entities. For instance, if one looked at Bitcoin’s security weakness, it would reduce the motivation to mine that coin, affecting the hash rate and total price.
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War-like situations
People have been debating on the apparent Bitcoin crash in 2021, and now we’re witnessing another downfall due to the war. We can say that the Bitcoin crashed as its value dipped below $30,000 for the first time since January, underlining the volatility of cryptocurrency when more and more individuals are interested in participating.
Easy Ways To Manage Risk When Trading Crypto
Every trader occasionally suffers a loss, but a good risk management technique will keep you in the market for the long term. Here are some methods for lowering your risk when trading cryptocurrency:
- First and foremost, choose a suitable and reputed crypto exchange platform,
- If you’re not actively trading, don’t store coins on an exchange,
- Always trade using 20-30% of your total portfolio,
- Plan a detailed exit strategy;
- Stay away from the hype.
The Bottom Line
Like any other investment, cryptocurrencies have a high level of risk. It is best to be aware of the crypto-market conditions before investing your first dollar. We advise you to study the market conditions properly to avoid losing money in any market crash.
Interesting Related Article: “Is Cryptocurrency the Future?“