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If you could use one word to describe the crypto market, it would most likely be "unpredictable." The value of crypto constantly fluctuates, and there's often no knowing where a coin's price will go next. Many avoid investing in crypto because of its crash risk, fearing that they could lose thousands in a market dip.
So, what factors play a role in sharp crypto price drops, and how can you get through one? We'll discuss all of that below.
What Causes Cryptocurrency Prices to Drop?
The value of cryptocurrencies can drop sharply overnight due to a number of different factors. The market is highly volatile, and the tables could turn at any moment. So, let's take a look at the reasons why cryptos crash.
1. Changing Crypto Laws and Regulations
Because cryptocurrency is a relatively new phenomenon, many national governments are concerned about its influence on their economy. Because of this, several countries have made crypto either illegal or restricted, which affects the people who already own crypto in those regions.
Take China, for example, which has one of the world's biggest crypto markets. So, when Chinese authorities banned crypto altogether, it significantly impacted the whole industry. Miners had to find another place to build crypto farms, and certain exchanges were urged to stop accepting Chinese users.
So, when a country like this kicks crypto to the curb, the global crypto economy and the value of coins themselves can suffer as a result.
2. Influential Figures
With social media being such an integral part of our lives, it's no surprise that celebrities and billionaires alike take to the web to give their thoughts and opinions on current events. But when it comes to fragile markets, one influential figure's criticism is enough to cause a crash. This is the case for cryptocurrency and the likes of Elon Musk.
Musk has already made considerable dents in the crypto market in the past. After adopting Bitcoin for payments in March of 2021, Musk's company Tesla caused a significant drop when it announced just a few months later that it would no longer accept Bitcoin payments due to its negative impact on the environment.
Because of this, Bitcoin's value fell by around 15%. Though it did recover, this example shows just how volatile the crypto market can be and how one person's outlook on the industry can cost people thousands or even millions of dollars.
3. Mining Restrictions
For a crypto coin to exist and be put into circulation, it has to be mined. Crypto mining stands as the backbone of the industry, but it's not always smooth sailing when it comes to this crucial process. There's a lot of debate around the ethical nature of crypto mining, as the enormous amounts of energy it uses negatively affect the environment. On top of this, many countries have banned crypto mining altogether.
This ban on mining can massively disrupt the market and cause coin crashes. For instance, in 2021, a ban on crypto mining in China meant mining farms had to relocate to nearby countries like Kazakhstan.
4. Widespread Panic
Sometimes, there is no severe issue causing a crypto crash. Sometimes, it's nothing more than investor panic. When a coin's value decreases a little and doesn't jump back up in a short period of time, investors begin to worry that the currency will soon crash, and they will lose significant amounts of money.
So, to avoid this possibility, the owners of the coin in question begin selling their funds off. This leads to a decreased demand, and the coin's value begins to fall. This causes a domino effect, wherein more and more investors sell their funds, and prospective investors decide that the crashing crypto is too risky to buy. This happens very often, but coins that suffer this kind of crash can often make a comeback after the panic has subsided.
5. Other External Factors
While we could keep listing more and more factors that have affected the crypto market in the past, the truth is that common factors aren't all that can play a role in crashes. These can be events or changes that don't have any relation to the crypto market, such as the COVID-19 pandemic.
When the Omicron variant began to sweep the globe in December 2021, the world economy began to suffer as it did at the pandemic's start in early 2020. Global stocks started to decrease, and this trend bled into the crypto market, causing big drops in coin value across the board.
How Can You Survive a Crypto Crash?
There is a truly endless list of factors that can cause a crypto price drop or even a total crash, and such risks are always looming over the market, even when things are going seemingly well. So, how can you survive a crypto crash if you've already invested?
1. Do Not Panic
As mentioned previously here, the panic surrounding drops in crypto value can make everything a lot worse. Though it seems tempting to quickly sell off your funds as soon as there's a price drop, this can contribute to an eventual crash.
Most price drops are often temporary, and big coins like Bitcoin and Ethereum have suffered crashes in the past, only to bounce back shortly after. So, it pays to take a moment and consider whether acting fast is the right decision for you in light of this.
2. Do Your Research
If a crypto token you've invested in is starting to fall in value, you must read up on why exactly that specific token, or the market in general, is suffering. The reasons why a coin has crashed often indicate whether the crash will be long-term or short-term. If the price drop is caused by a big name making a cynical statement or selling their funds, this will most likely be a temporary issue, and you shouldn't panic.
However, more long-term problems, like new laws or global crises, could result in a more severe hit to the market. There's still no real way of knowing exactly how any factor will affect the crypto market, but it pays to educate yourself and understand the situation.
3. Consider Diversifying Your Portfolio
If one particular coin you own has crashed or keeps experiencing significant drops in value over time, you may want to consider investing in other tokens so that you're not putting all your eggs in one basket.
This doesn't mean pouring huge amounts of money into multiple other cryptos. Just getting your foot in the door and investing in two or three coins instead of just one can be beneficial. You could also consider investing in other digital assets, like NFTs, but remember that the price of such assets also depends on the value of the coins you can buy them with.
The Crypto Market Is Exciting Yet Unpredictable
While the possibilities offered by the crypto world are undoubtedly exciting, it's important to remember just how volatile the market can be. Coins crash regularly, so it helps if you do your research and have a plan in place if your chosen coins experience a significant drop. Staying in the know can be the difference between making or losing big bucks.