3 reasons why the crypto market crashed and what to do about it.
It’s time for us to come clean. Okay, we know you have heard the news about the crypto market crash. The internet cannot stop talking about the crypto crash. Platforms like Twitter are full of self-proclaimed ‘experts’ screaming, “I told you so!”. Now you are wondering why this is happening? Is this it? After all the big talk about cryptocurrencies changing the world, are we finally done?
First of all, let’s explain what this article will be about. This article will break down three things that we believe contributed to the crypto market crashing. We will delve into what you need to do to help you navigate this crypto crash. We will also share examples highlighting how the crypto market works and how people indirectly contribute to the crypto market crash.
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Why is the crypto market crashing?
Imagine walking into a room and seeing a crowd of people standing in a circle. Everyone is looking down at a broken plate in the middle of the circle. You ask the group, “what happened to the plate?” Suddenly, everyone starts talking about what they believe happened, and everybody’s opinion is different. Just like the plate example, there are many opinions about the crypto crash.
The crypto market is difficult to predict. The prices of crypto assets rise and fall every day. There are a lot of factors that could contribute to a crypto market crashing. What we do know for a fact is that this has happened before and it started with Bitcoin.
Bitcoin is the dominant crypto asset in the industry. When the price of Bitcoin is affected, the whole market is affected.
In 2017, the price of Bitcoin dropped from $20,000 to around $12,000. It felt like the end of the crypto industry, but as before, Bitcoin rose again.
Three factors that triggered the crypto crash
General economic instability and inflation: The crypto market isn’t immune to economic factors. If the economy is terrible, the crypto industry would also be affected because the people interacting with the crypto industry are affected by the economy.
We have all seen the high prices for goods and services since the rise of COVID. With inflation, the stock market, and a war in Europe, the global economy has been hurt.
To help you better understand, let us give you a simple example. Imagine the economy is terrible, and everything you could have easily afforded is now getting more and more expensive. Your salary isn’t changing, but your rent is increasing. So, you suddenly remembered that you have some crypto assets that you could sell off for fiat currencies and settle your expenses. This does not cause the whole crypto market to crash, but it doesn’t end there.
Down your street, not too far, someone else is selling off their crypto assets to settle expenses too, and they are not alone.
Soon the market will be flooded with people trying to sell their crypto assets, and not enough people are willing to buy them. Many sellers would start reducing the price of their assets to help them sell quickly. This spreads across the whole crypto market and could badly affect it.
Although, this is a simplified version of how things work. There are so many other factors in play, but they all result in the crypto assets in circulation losing their value.
Covid and the Bear market: Have you ever had one of those moments when it feels like everything’s just falling apart? Well, that’s how a bear market feels in the crypto industry. Crypto assets are dropping in value, investors are panic selling, and all the charts are red. This on its own is problematic, but not new. Bear markets are as natural as the sun and rain.
Many investors have strategies set up for when a bear market occurs. To them, it’s like preparing for a rainy season.
What nobody prepared for was Covid. Covid came and disrupted everything. Inflation skyrocketed, and everybody around the world felt its impact. Instead of a rainy season, it felt like we were getting an earthquake.
A coin named Luna: So there is this crypto asset or currency named Luna. Luna works with another coin called UST in a blockchain called Terra. UST is an algorithmic stable coin.
Stable coins are usually tied to real-world assets such as the US dollar. This means that one unit of currency would equal 1 dollar. The dollar note that the stable coin represents is usually kept in a bank or somewhere else to keep it safe. It is not meant to be used but would help stabilize the coin’s price. As the name suggests, stable coins offer some stability to the industry.
Algorithmic stable coins such as UST and Luna aren’t tied to real-world assets. Instead, they use a complex algorithm to keep the coin price stable. If the demand for UST is more than the number available, the algorithm knows what to do. UST can be turned into Luna and vice versa.
When the algorithm sees that the demand for UST doesn’t match the supply, users are incentivized to convert their Luna to UST. Once the UST in the market is too much, users can convert it back to Luna. This ensures that there is just enough of both to keep the prices stable. It felt like a flawless system, and nobody expected a complete crypto crash. When news about the crypto market crashing started circulating, it was closely associated with information about both Luna and UST losing their value. UST’s price dropped to 30 cents, and Luna dropped even lower at around $0.00001655 after reaching $81 earlier in the week. Over forty billion dollars were lost in a matter of days.
Three things to help navigate a crypto market crash.
Keep your thoughts on the future: The past week has proven the impact of negative news. There is no doubt that the crypto market crash has been worsened by negative press. The crypto industry, as well as its assets, are highly volatile. You must learn to see the bigger picture by doing extensive research. Do your part to get informed about any crypto asset you are interested in. Watch videos, read an article, join a community, and do your part to learn about what is happening in the industry. You should be active when investing in crypto assets.
Doing all of this doesn’t always guarantee that you won’t make mistakes. Terra Luna’s crash surprised even the most seasoned crypto investors. Researching ensures that there are fewer bad investments in your crypto journey.
Don’t sell out of Panic: When has doing anything out of Panic been a wise idea, especially when selling off your crypto assets? Many people lost their Bitcoin after the crypto crash of 2017. Many people lost good money selling off their crypto assets at the time, but a few people amongst that group held onto their crypto assets. Bitcoin eventually recovered, and so did the market.
Think about investing in the dip: Don’t do this for projects you don’t understand, even if they have the most impressive website. Read about the crypto project and learn about the problem they’re trying to solve in the industry. If it’s worth it to you, then invest in the idea. You can safely buy cryptocurrencies like Bitcoin,Ether (Eth), and Tether on ValorExchange within seconds.