The cryptocurrency market is very sensitive to changes of the fiat money rate, which is confirmed by statistics. On traditional exchanges, now professional speculators are trading, their experience allows not to react right away to the emerging drawdowns of quotations. On the cryptocurrency exchanges the situation is different – here the bulk of inexperienced traders often and unconsciously reacting to fluctuations in price rates.
Another significant reason is the precariousness of the cryptocurrency, if you compare it with fiat currency. There are still factors contributing to destabilization of cryptocurrency in the modern economies. Every investor, working with digital money, needs to know about them.
Let’s consider the most significant reasons for the drop in the value of virtual currency and their consequences.
Why does the cryptocurrency depreciate?
There are many factors provoking a depreciation of electronic coins, but specialists single out 5 main:
- political and economic;
- moral and ethical;
We will analyze each category in detail.
The cryptocurrency depreciates most often due to:
- Overheating of the market. On all financial markets (Forex, Moscow Exchange, etc.), upward trends are always replaced by a decrease in the value of exchange-traded assets. It’s inevitable. Certainly each cryptocurrency reaches the highest price, and then the quotes are falling. This decline is also temporary. It will be followed by a rise in price of financial instruments. It would better not to panic and rush to sell available coins.
- Dependence on bitcoin. Since the unquestionable leader of crypto market is bitcoin, all the altcoins (Ethereum, dash, ripple, etc.) depend on it. If the main virtual currency becomes cheaper, the other electronic money will lose value as well. It is necessary to meticulously monitor the important events connected with bitcoin.
- Pump and dump. On crypto exchanges, a special type of fraud, called pump and dump, is popular. Some crypto traders are specifically grouped into communities artificially stimulating the increase / fall in the price of a certain cryptocurrency asset. This contributes to the rapid development of excitement among the majority of traders. They quickly begin to sell the overvalued existing assets, and here the depreciation is.
Of course, with bitcoin and some other top crypto coins, such manipulations are almost impossible, since a fantastic capital to buy up expensive currencies is needed. However, it works with the less popular crypto money.
Successful hacker attacks. Hacking the system and stealing its internal cryptocurrency significantly undermines investor confidence in such an asset. Today this often happens.
- Forks are also an obvious cause of prices drop. When the fork is better than the basic cryptocurrency for some parameters, traders quickly switch to it, losing interest in the progenitor. If the fork is worse, then there will be no investment in it, which means that the cost will decline.
- The emergence of a strong competitor. When the new analogue of cryptocurrency appears on the market, other cryptocurrencies often lose their value. This is natural, since users need better reliability, functionality and profitability. The cost of a more “ancient” digital currency will decline.
Nuance! Here sometimes not a strong competitor is required. Sometimes the developers are implementing an unsuccessful upgrade of the crypto coins and most of the investors do not like the innovations. There is a massive sale of the asset, causing its depreciation!
Political and economic factors
Prohibitions of reputable financial companies. The price reduction happens when the management of some large funds, banks or other structures objects to the support and use of crypto money.
- Bans of digital coins in some countries. In many countries, the government prohibits exchange transactions, purchases / sales or investments involving the cryptocurrency use. Traders react to such restrictions. The cryptocurrency market begins to draw down.
Important! Major Powers influence the value of coins the most. Even the slightest assumption, regarding the soon ban or restriction of electronic money, can cause a collapse!
- Authoritative financiers’ assumptions and points of view. Also, this factor often determines the negative trend on trading platforms. Statements regarding bitcoin have the greatest effect.
Moral and ethical factors
These causes probably seem insignificant; however, such moments also affect prices. The strongest reasons are:
- Unethical methods of work with altcoins. Bitcoin developers have proven their own sustainability and a serious working mood, but the teams of some late cryptocurrencies can openly steal investor funds. From the beginning they create fraudulent projects, so that after “collection” of investments, they instantly go bankrupt.
- There are also quite a few cases of the concealing of some of the emitted crypto coins. Later, after the asset price rises, this hidden capital is quickly realized on the crypto exchange market, which provokes a price decline.
- Lazy attitude of developers to holders of their virtual currency. Ignoring the shortcomings, no feedback, no news of the project, etc. Of course, people can deal with such shortcomings for a while, but then people sell this digital money.
- Behavior of project managers or owners of crypto exchanges in cases of electronic coins stealing. If the coin holders are compensated for losses, then, as a rule, the cost of coins is not affected by the incident. When users are left without support, the reputation of the cryptocurrency is significantly being destroyed, and coins are rapidly becoming cheaper.
The behavior of traders in many ways contributes to an undesirable change in the value of electronic money. Falls occur due to such circumstances:
- Unreasonable opinions and unverified information create all kinds of fears or phobias regarding crypto investments into users’ minds. This stimulates active sales of exchange-traded assets and provokes exit of many traders from the cryptocurrency market. The result is low demand and minimum orders for the purchase of coins. The value of the currency is reduced.
- Rapid disappointment in the digital money market. Many people rush to the crypto exchange, seeing the incredible rise in prices of some crypto coins, and at the beginning they are getting profit. There is an illusion of stability of this trend. But after the price increase, there is a small price decline, when investors, especially those who are not very experienced, lose a lot of money and quickly exit the market. This triggers a new fall, which throw more stable, patient speculators off the trading, etc. As a result, the loss of the altcoin price or a decline in the whole market, if we are talking about bitcoin.
- Instability of cryptocurrency rates because of different occasions, the future news, small force majeure and other things that make traders constantly nervous. Traders, who are unable to stand the stress and worries caused by cryptocurrency capitals, leave the market. Not quickly, but systematically the rate of electronic coins starts to fall.
As we see, there are plenty of factors that lead to the cryptocurrency depreciation. For each case, there are some techniques that help to effectively save the trade capital or earn on the quotations drawdowns.
The talent and professionalism of the trader is determined by the rapid identification of the forthcoming price fluctuations, and finding the most promising solutions for profit. It is necessary to learn how to recognize such falls in order to receive a stable profit on cryptocurrency exchanges.