For years, people have been calling cryptocurrencies a bubble and proclaiming that their ultimate “burst” is imminent. If that’s true, of course, it begs the question of what, exactly, could cause such a major crash. Here are the four primary reasons why cryptocurrency crashes, and a few justifications for why you should trust in the overall fairness of the market:
1. Regulation
Regulation has been both a blessing and a curse in the world of cryptocurrency. While regulation has made crypto much safer for investors, the stipulations surrounding regulation can lead to fluctuations in the market. For example, if regulators in the E.U. or the USA get together to ban crypto exchanges while other companies stepped in to provide services within the crypto industry, it would have a large effect on cryptocurrencies across the board.
Take China, for example, which “banned” cryptos back in 2017. Despite moves taken by the country, crypto is essentially impossible to ban. The people and businesses interested in using it simply took their business elsewhere. While many people expected the market to collapse, it actually began to boom.
2. Crypto Exchanges
Before about 2014, there was a single crypto exchange that was responsible for more than 70 percent of all trading volume. It was called Mt. Gox and, at the beginning of 2014, it froze all trading, which resulted in an 80 percent crash through the entire crypto market.
While something like this could theoretically happen again today, the crypto market is so distributed now that virtually no exchange is responsible for more than 10 percent of all trading volume. This is as it should be. As long as trading stays this distributed, crypto crashes due to greedy exchanges will be much less likely.
3. Extension of Credit
Some exchanges allow people who trade on them to purchase cryptocurrency coins using credit cards. According to recent estimates, anywhere from 3-4 percent of purchases are made on credit cards and many of those can’t be paid back to buyers.
While this is one of the many factors that will inevitably drive the market higher, it’s unlikely that investors will leverage purchases within the market. Even if this did take place, it would be unreasonable to expect the action to have a strong impact on the market.
4. Tether
Tether is one cryptocurrency that acts as a “wildcard” within the whole system. Issued seemingly out of nowhere, the system behind Tether is very complex. Today, Tether is priced right around $1.6 billion and is connected to many other cryptocurrencies and exchanges. Because of this, any potential discovery that Tether’s valuation is inflated or exaggerated could cause a massive hit to the overall market.
Luckily, analysts place this risk as one with low probability and don’t see a realistic chance that it will have a major negative effect on the market anytime soon.
The Overall Stability of the Crypto Market
While the crypto market gets a great deal of flack for being unstable, it’s fairer than many people give it credit for. Although it’s true that the market flexes up and down, it generally holds gains and experiences fluctuations it ultimately recovers from. This is good news for investors. If you can handle a bit of uncertainty, there’s a great deal to be gained in the crypto market.
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