Cryptocurrency market crash: How bad can it get?

The cryptocurrency market is tanking under soured mood with brutal institutional selloff leaving retail traders  to cop huge losses, and this cannot be called anything but a crash.

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The reality is when the market whether stock or crypto is in a downturn, it isn’t always clear until well into or after the midst of a decline because first the seasoned investors jump ship and leave in trouble those who are still scratching their heads to figure out what is happening.

With bitcoin and many altcoins losing 20-30% from their recent highs, you might be wondering if this is a tantrum, a crash or simply a sell-off.

No matter what you call it, not only the sharp decline over the past 24 hours but also overall market performance that we have witnessed so far since around May 11 have been a cause for concern for all types of market participants whether investor, trader or speculator or a random guy who hopped to the high seas.

So why do huge sell volumes we see today happen?

Well, the fear that things will spiral out of control and wipe out all your savings is very powerful. It is even more powerful if you are an investor managing others’ money and your career is at stake.  This is when investors, understandably, can easily slide into panic.

Of course, there are always chances that prices could level off and regain at least some ground and many reference the past to say how it recovered last time. Is this justified? Not really, this historical picture or data do not guarantee that the market will recover.

What is possible to say today is that due to the reason below the currents lows won’t spell the bottom for most cryptos and the worst might come as the selloff runs its course in the coming days.

Persisting selloff on the back of prevailing downtrend may take bitcoin further down to the $20,000 level, dragging down the entire market with proportional percentage-point  declines in altcoins.

Why is the market crashing now?

The current crisis has many causes and some of them are fundamental to threaten the future of the market. Generally, a market crash is a rapid and often unanticipated drop in prices. Although it usually has underlying causes, it is usually amplified by public panic, inducing panic selling that depresses prices even further.

While it is impossible to pin everything on one specific factor, it looks like investors and traders are becoming increasingly wary about the prospects of the cryptocurrency market due to many reasons, among them:

  1. China and its huge influence on the cryptocurrency market. And the recent ban announcement.
    Every single time China makes news about cryptocurrencies, the entire market plunges. This is not without a reason. China is one of the biggest participators in the cryptocurrency market by both the number of traders and volume of trading but also is one of the most regulating countries in the world.
    In addition, Chinese traders and investors has significant control in mining and staking activities due to low-cost electricity and local availability of huge amounts of money as the government has restriction on the money outflow from the country.
    So, China’s recent ban which prevents individuals from holding cryptocurrencies and orders institutions, including banks and online payments channels not to offer clients any service involving cryptocurrency is ver significant.
    China’s chilly stance toward cryptocurrency goes back years. The recent crackdown may also be in part to boost China’s state-backed digital yuan initiative which is more like a centralised digital currency. Previously in 2017 China closed down its local cryptocurrency exchanges to root out speculative betting that had then accounted for 90% of global trading in bitcoin.
  2. Lofty valuations
    The upward traction in the market ran out of steam around early May as the sustained rally over the previous two weeks had pushed the market to levels considered as overbought thresholds by many traders and speculators. Overbought is a term used in RSI technical analysis to describe a condition when an intensified buying pushes the price too far up usually after a sharp percentage increase in short period of time. The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. The RSI provides signals that tell investors to buy when the currency is oversold and to sell when it is overbought.
    When this moment strikes, seasoned investors pause to see if the slowdown is a pullback (dip) or a reversal.
    A pullback is a temporary pause or dip which might actually quickly turn into an upward momentum while a reversal is a more long-term drop against the otherwise prevailing trend.
    If there are signs of a reversal, experienced traders and investors take the profit and flee., which eventually brings further declines.
  3. Biden’s capital gains tax
    The actual downturn in the market takes its roots back to early May when President Joe Biden’s capital gains tax (CGT) hike hit the news, triggering cautious market sentiment which eventually led to wait-and-see by retail and corporate traders.From the looming legislation aspect, the move makes sense since the tax would later disproportionally affect late sellers of the assets that have generated massive unrealized gains.
  4. Elon Musk 
    Tesla CEO Elon Musk’ putting the spotlight on the environmental costs of crypto assets was an off-moment as it puts pressure on corporate investors who have questions to answer due to shareholder concerns.
    However, the concern about bitcoin’s energy use is far from limited to Elon Musk as the operation of cryptocurrencies like bitcoin requires substantial computational power equivalent to some country’s national grid to process transactions and to maintain a transaction ledger.
  5. Canine movement
    Market noise and buzz around joke currencies and their surge have discouraged serious investors as they fear such speculations threaten the global institutionalisation of the serious technology and innovation and would prefer to sit back and wait. At the same time, some big players used the frenzy to make large gains from such currencies even though they don’t seriously believe in the future of such joke currencies. So, their exit to take profit created obstacles for the market’s upward momentum as sucked money out of the market.
  6. Seasonality 
    It is very typical to sell off your holdings before the end of May even if nothing is going on. “Sell in May and Go Away” is an old stock market adage backed by surprisingly robust historical data, especially in the Northern Hemisphere where market activity slows down due to upcoming summer and holidays. Historical data show that overall market returns in many countries during the June-October period are systematically negative or lower than the short-term interest rate. The effect has been strongly present and consistent in most developed markets . As a result, many experienced investors try to offload their holdings before the end of May to preempt the expected retreat as they think others will do the same.
  7. Profit-taking 
    As the market reached new record highs, it is very common for  traders and investors to lock in gains as there is always risk of an unexpected reversal or pullback – well because even if you don’t book profits now, others do – which means selling.
  8. Scepticism and reflection 
    After a price surge and you have the account balance in green, you start to think if any cryptocurrency is here to stay. Is there any cryptocurrency that can become a widely accepted currency? There are certain qualities associated with a good currency and a currency has to possess them to stay. Such thoughts and reflections can make you to take at least some profit now as you somehow made huge money but not sure what the craze is about.
  9. No regulation and free fall 
    In stock markets, governments act to slow down crashes where they can. Regulators aren’t very worried about a possible crash in digital currencies as the European Central Bank put it yesterday the risk of cryptocurrencies affecting the financial system’s stability looks “limited”. Cryptocurrencies have very limited and negligible usage in the economy indeed.
  10. Leveraged trading 
    When you use leveraged trading, you are more cautious. Many crypto exchanges allow traders to trade on a margin account (using leverage), which means that they can use a relatively small amount of money upfront to borrow the rest in order to hold large amounts of digital assets.  Although the leverage magnifies profits if the price goes in the favorable direction (depending on short or long orders), it leaves traders in a much more vulnerable position if price goes in the wrong direction.
    When a pullback starts, you feel scared and rush to sell off because a highly leveraged trade can quickly deplete your trading account as you will rack up greater losses due to the bigger exposure.







Risk Warning: Cryptocurrency is a unregulated virtual notoriously volatile asset with a high level of risk.  Any news, opinions, research, data, or other information contained within this website is provided for news reporting purposes as general market commentary and does not constitute investment or trading advice.