Cryptocurrency is known for its extreme volatility, and recent weeks have not been any different. As more and more people are exposed to cryptocurrency, cryptocurrency is still experiencing price discovery, which is causing erratic price movements that are nearly always extremely unpredictable. As cryptocurrency heads towards mass adoption, we will continue to experience such erratic price movements as these cryptocurrencies find their true value in terms of U.S. dollars. Until then, we should always be prepared for volatility in the cryptocurrency markets.
Over the weekend, the cryptocurrency market experienced a very stark “flash crash,” according to Forbes: “An overnight crash that started late Saturday tanked the total market capitalization of cryptocurrencies around the world by about $310 billion in less than 24 hours” (1). Although the market eventually recovered, the crash caused a lot of panic-selling, as cryptocurrency traders began liquidating their positions. Because of cryptocurrency’s somewhat mysterious nature, the exact reason for this flash crash is unknown at this time. However, there are several reports that may help to unpack the reason why this flash crash occurred in the fashion that it did. As experts continue to analyze what caused the crash, there are several possible key factors that may have caused this crash. By analyzing these factors, we can try to predict the next cryptocurrency crash.
There were several possible causes of this flash crash; as Forbes notes, “Analysts pinned the sudden losses to a stark nearly 50 percent decline in bitcoin’s hash rate, which measures the total processing power being used to mine the cryptocurrency and process its transactions, as a result of blackouts in China’s Xinjiang region, which is home to one of the biggest bitcoin mining networks in the world.” (2) This decrease in the production of Bitcoin may be one of the factors that caused the cryptocurrency market to crash. Although Bitcoin is not the only cryptocurrency, Bitcoin is currently the dominant cryptocurrency and drives much of the price action that occurs in the cryptocurrency market. As of the time of writing this, Bitcoin’s dominance is at 50.2 percent according to Coinmarketcap. This dominance means that when Bitcoin falls, other “altcoins” follow it, and when Bitcoin surges, altcoins do as well.
Flash crashes in both the stock market and cryptocurrency markets occur often, and as a result of cryptocurrency’s infancy, there will be plenty more moments of panic-selling. However, in the same way as we’ve seen in the past few months, cryptocurrency also has the ability to surge tens and hundreds of percent in just a few months. Anyone looking to invest in cryptocurrency should be ready for significant price dips. In the same way, cryptocurrency is also susceptible to large price increases that can happen at any moment. As always, only invest what you are willing to lose. Invest any more, and you may find yourself making investment decisions based on emotion rather than empirical information.
As cryptocurrency heads full steam ahead towards widespread adoption, erratic price movements are to expected. However, as the common stock market saying goes, “Time in the market beats timing the market.” Act with due diligence and don’t take anything said in this article as investment or financial advice. Cryptocurrency is here, and it’s here to stay. As more and more people invest in cryptocurrency, we will see more price stability and much less volatility, and this will continue in legitimizing cryptocurrency.
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https://www.forbes.com/sites/jonathanponciano/2021/04/18/crypto-flash-crash-wiped-out-300-billion-in-less-than-24-hours-spurring-massive-bitcoin-liquidations/?sh=70c464bb2c89