Why is the crypto market on a free fall?
Even though no one can pinpoint the cause of the market crash yesterday, the following could be the possibilities!
Short answer: The sudden crash in the crypto market could be due to three broad factors.
- People’s Bank of China reiterated that digital currencies cannot be used for payments, which exacerbated worsening sentiments
- Elon Musk said Tesla would halt sales using cryptocurrencies, owing to the environmental factors
- Correction from a massively long bull run
“Large price changes tend to be followed by more large changes, positive or negative. Small changes tend to be followed by more small changes. Volatility clusters.” — Benoit B. Mandelbrot
The crypto market has been dropping since Musk began questioning BTC’s negative environmental impact about a week ago. However, the combined impact of Musk’s reassessment of the use of cryptocurrency and China’s action led to the massive crash of the market yesterday. China announced yesterday that financial and payment institutions are banned from pricing or conducting business in virtual currencies. While exchanges and platforms had been banned back in 2017, the latest announcement was directed towards the institutional investors. China has been making moves to create its own digital yuan.
The volatility of the market was on full display, as the sharp decline in prices led to panic selling across various cryptocurrencies. In crypto markets, the momentum can turn quickly and selloffs can accelerate as people try to book their gains. Investors who entered the market in 2020, will still have large gains in their books, though they might get anxious that these won’t last for long. The crypto market cap shrunk by more than $600 billion. The price of Bitcoin (BTC) slid by over 30%, going down to as low as $30,000, though it soon bounced back to the $40,000 levels within a span of 4 hours.
The value of BTC can change by thousands of dollars in a short period of time, and it is definitely not for the faint hearted. On the last day of 2020, BTC closed under $30,000 and in mid April it flirted with $65,000.
There has also been speculation regarding some organised market manipulation, which caused the massive dip in the price of BTC. There were some articles shared on 4chan, Twitter and Reddit, that talked about how the warning from China against cryptocurrencies was meant to cause a panic sell in the market. However, that information is unverified and subject to each one’s own interpretation.
On the other hand, Ethereum (ETH), the second most valuable cryptocurrency, was down by 33% as well. Dogecoin (DOGE) the meme coin popularised by Elon Musk also fell by 45% during the crash.
As always, during the crash all major coin exchanges crashed, not allowing users to buy the dip.
In spite of such volatility, BTC enthusiasts remained convinced that not only are cryptocurrencies here to stay, but also, that its value could reach hundreds of thousands dollars in the near future.
A great learning from this market crash, is to value Dollar Cost Averaging (DCA) ~ An SIP like model which helps you time the market better and have a better entry strategy so that you do not accumulate the coins at their peak and then have to sell during the crash like over 1.1 Mn users did across the globe.
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