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There are many causes of crypto dip. Cryptocurrency has had a rough journey since this year. As of May 16, Bitcoin(BTC) had lost almost 40% of its value, while other cryptocurrencies have also ditched. Altcoins like Ethereum(ETH) and Binance Coin(BNB) are down to about 48%.
Yes, cryptocurrencies are volatile by nature as 2022 has proven, but were crypto investors expecting the sudden crypto crash?
This isn’t new to us as crypto has taken a big dive before. In May 2021, cryptocurrencies went through a big drop. Bitcoin fell by more than 45% in value. Despite the drop, many crypto investors were still interested in cryptocurrencies. According to Vin Narayanan, Vice President of strategy in early investing, he said in quotes,
“As crypto adoption increases, it will become more stable.”
Even though many companies and a few countries have started to adopt cryptocurrency in their businesses and legal tender respectively, the crypto market, however, still dropped. What may have caused the crypto dip?
Top 5 Causes of Cryptocurrency Dip
As crypto investors are burned down over the current crypto crash, many traders are beginning to ask what the causes of crypto dips are. Here are 5 reasons why crypto crash happens:
1. Crypto Investors are Taking too much Leverage
A BTC leverage ratio reported by CryptoQuant showed that many investors were taking risks in the crypto space as of January 2022. Similar to conventional markets where investors will use debt to invest in purchases for the future. This is a big risk as nobody is sure whether or not the investment will yield profits. As crypto is a volatile asset, it is reasonable for crypto investors who used debt to invest in crypto to panic over any little drop. Once there’s a drop, many of these investors will end up withdrawing their currencies for the fear that they will lose the debt they owe. This cycle is very similar to what happened to the stock market in 1929 and 2008. These kinds of crashes are very unfair to markets like people who do not have much liquidity.
2. Lack of Liquidity in Cryptocurrency
One of the biggest problems the crypto market faces is when leverage investors liquidate their assets. When a large portion of assets is being withdrawn from the market, it is bound to be crushed. This is common when there’s a slight decrease in a crypto value, then, out of fear, the crypto holders begin to liquidate their assets. This action causes the market to flood, especially when a whale – a person who holds a large portion of the crypto – sells a significant amount of the cryptocurrency.
3. Cryptocurrency Regulations
Overall, when governments ban crypto mining, crypto trading or any crypto-related processing, the general price of cryptos can decline. In June 2021, when China banned crypto mining, miners had to leave for other places that were miner-friendly. This caused a decline in the network’s hash rate. As seen, when prices decline, the hash rate declines and vice versa. And when hash rates decline, it will be difficult for miners to produce the coins they are mining.
4. Crypto Influencers have the Power to Cause Volatility
Crypto investors need to understand that crypto advocates and key influencers can tweet and cause an inflow of capital. This is obviously seen when Elon Musk supported dogecoin and its value rose. This can have the same effect but this time, negatively.
This is due to the value of asset classes based on investor sentiments and crypto’s lack of liquidity. A huge influencer can say something bad about a particular coin and that coin will begin to decline in value after just a few hours of the statement.
5. Crypto Security Breaches Causes Fear
Blockchain and network security are other factors that could cause a crypto crash. For instance, when crypto investors hear that there’s been a security flaw in a crypto coin like ETH, that would affect the desire to mine it but rather, withdraw from the coin. These actions cause the hash rates and overall price to fall. A good real-life example is the recent crash of the Luna coin.
Conclusion: Causes of Crypto Dip
These are major causes of the crypto dip. Crypto investors need to be intelligently informed on the market and understand the inflow and outflow of prices, so as not to lose investments when sudden crypto crashes happen. Because crypto crashes are bound to happen as it is a volatile market. More importantly, Do Your Own Research(DYOR).