Cryptocurrency markets are famously volatile. In fact, volatility is where a large amount of crypto media attention comes from and it’s something that attracts most cryptocurrency traders and investors.
Volatility creates the opportunity to earn big profits, but it doesn’t always play nice. What goes up must come down… no investor is immune to the infamous cryptocurrency crash.
What a crash looks like
A cryptocurrency crash is when the price of a cryptocurrency falls dramatically in a short space of time. This has happened many times before and it’s not unique to crypto. In fact, all financial markets have price crashes, they are just not as brutal or as common as crypto.
Cryptocurrency is a unique asset class in which there is potential for tradable assets to drop in price absurdly quickly. Let’s look at the most common causes of a cryptocurrency crash.
The causes of a cryptocurrency crash
Cascading effect – the catalyst
Almost every cryptocurrency crash begins with a trigger or a catalyst but will proceed because of cascading sellers.
Essentially, once a small sell-off begins people start panicking. It only takes a small amount of panickers to start selling to drum up more fear and heightened selling. This isn’t helped by traders having sell orders or stop losses in place to reduce risk because they will be triggered and contribute to the cryptocurrency crash.
As the panic spreads, selling grows and crashes peak very quickly.
‘Support’ is a term used in technical analysis that refers to a key price level that traders are watching closely. Essentially a support level is said to ‘support’ the price of an asset and if the price falls below this support then traders expect the price to continue downwards to lower support levels.
When support breaks, traders will either close positions or open short positions, both of which create selling and can contribute to a market crash.
Cryptocurrency markets famously lack liquidity. This means that there are not enough buy and sell orders in the order books, which is especially true on smaller exchanges and with lesser known crypto coins.
When there isn’t much liquidity, a cryptocurrency crash is even more likely because the market is easier to influence. In a low liquidity market a relatively small sell could cause a huge price drop.
Large price crashes can happen when an asset reaches a new high and traders start to take profit on their positions. In doing so they are selling off the asset which then can invoke panic. Other traders start to realize that the top is in and price starts cascading downwards.
The crypto world feeds on news. Good news can cause prices to go up… and bad news can cause prices to crash.
Some of the most famous cryptocurrency crashes have been due to projects announcing closure or news websites uncovering exit scams. When investors know their investment is dead in the water they all rush to sell – causing a cryptocurrency crash on a new level.
Start trading properly
If you are looking to start trading or investing, don’t start with guesswork. Check out our live technical analysis feed to learn from the best, or read Blockfyre reports to find gems and learn how to conduct investment analysis.
Most importantly, be careful out there and know that a cryptocurrency crash can happen at any time. Don’t get caught out – trade with care.