If you ask anyone in the crypto-verse to describe the cryptocurrency industry in one word, you’ll probably receive responses that include ‘volatile.’ As promising as cryptocurrency trading sounds, the actual market reaches skyrocket values only to crash almost as quickly. This rapid change in crypto’s importance is not a new scenario in the field – it’s familiar and often happens daily. Due to crypto’s volatile nature, you’ll often read news about a specific crypto’s price drop and crashes in the crypto market from time to time. Since we’re talking about huge losses here, it’s wise to find out how to read a market crash before it hits you big time. Read on to learn the critical tips in determining that the market is crashing.
The Cryptocurrency Market Crashes
Before you enter the cryptocurrency industry, you probably have heard and been warned about its volatility. Cryptocurrencies like Bitcoin go through price fluctuations of almost 50%, increasing rapidly only to crash instantly. In the last months of 2021, Bitcoin reached an all-time value of over $68, 000 but the happy faces of its investors were immediately wiped away after it suffered a consistent fall in price as we approached 2022.
As mentioned, these situations are every day in the crypto field and do not entirely mean that the whole market will crash. However, it could be a warning sign for crypto traders and investors about cryptocurrency’s risk. This is why it’s crucial to know the signs that a crypto crash is approaching. While some prefer to do research and study for days, some traders choose to engage in platforms like Bitcoin Loophole and seek help from professionals.
This cryptocurrency platform connects traders to reliable brokers in the market equipped with the appropriate skills and knowledge to navigate and determine the status of the market. However, extensive research before entering the market would also help you in the long run. To give you an idea, here are three of the signals that a crypto crash is approaching.
- Market Value to Realised Value (MVRV)
This first indicator refers to a cryptocurrency’s market value ratio to its realised value. The realised value is based on the cost basis of the coins; the market value is based on the actual value of the supply. This indicator lets you know if a cryptocurrency’s value is overpriced or undervalued at a particular time. When the indicator is high, the asset has a large amount of unrealised profit.
However, when the MVRV reading is over 3.5, a top formation usually comes to life. Investors are most likely to harvest their gains when the market value to realised value is high. This strategy supports the argument that it shows valid signals that determine whether Bitcoin has crashed or if it’s overvalued.
- Consumer Sentiment is low
The current volatile situation in the market has left many investors shocked and traumatised. Due to this, study shows that consumer sentiment and confidence in cryptocurrencies have become weak. While prices have recovered, experts believe that the lack of strategic confidence is terrible news for the market as it could lead to poor sustainability or no motivation in investment buying.
- Realised Cap HODL Waves
The Realised Cap HODL Waves chart is another excellent indicator to detect if crypto crashes. The chart gives information about investors’ actions and whether they’re nervous or comfortable. An increasing line on the chart indicates that investors are comfortable, so there’s no risk of crashes happening, and these investors are hanging on to their assets.
Cryptocurrency Crash Causes
Even though crypto crashes seem pretty standard, they may significantly impact a trader’s career. So, if you’re wondering why do these crashes happen? Check out the possible causes of crypto crashes below:
- Breaches in security
One of the main factors that cause a crypto crash is breaches in the blockchain and network security. This type of crash happens just like the regulatory disruptions from the government. Experts mentioned that the security flaws that cause chaos in cryptocurrencies impact the decision of some miners to handle it, affecting the hash rate and overall price of crypto.
- Lack of liquidity
Among the biggest problems of the crypto market is when leveraged investors liquidate a massive portion of their funds in the overall liquidity of the crypto market. Unlike the stock market, the number of buyers waiting to earn some unloaded coins is not always stable – which is why some crypto crashes happen. A portion of investors is waiting to buy while a bunch of cash has already been sold.
- Crypto startups
Since Bitcoin was introduced to the market and gained popularity, more and more cryptos have emerged in the market. While it’s good to know that more people are getting hooked up with crypto, the problem is that most of these platforms are start-ups. We all know that not all start-ups are destined to survive and be successful. A Crypto crash happens if a project closes for good or is referred to as a scam.
Can Crypto Assets Be Redeemed After a Market Crash?
No matter how many journals, articles, videos, or publications you see indicating cryptocurrency’s future, no one knows where this industry will be in five or ten years from now. After a total market crash, it might be difficult for cryptocurrency to stand independently; however, others believe and hope that cryptos, especially Bitcoin, will eventually come back from a market crash.
On the contrary, some people believe that cryptocurrency has no future. This means that after the crash, fewer people would be interested in reinvesting their money. Regardless, if you’re part of the few who still wish to invest, you must be careful about which cryptos to buy and entrust your funds to. Remember that not all cryptos are equal and that some carry higher risks.
Crypto Crash: Buy vs Sell
The involuntary action that investors and traders do when they know that the crypto market is crashing is panic. As challenging as it can be, try not to panic because you might do radical things such as buying or selling your cryptos without thinking further. No one wants to see their investment fall in value, and it might be tempting to cut your losses immediately and look for other opportunities. However, the market could be up again in the next few days!
Take a deep breath, look at the bigger picture, and decide. Understand that volatility is normal, and based on previous data, the market has no other way but to go back up. Remember that the buy-and-hold investment strategy is often the best way to build long-term wealth. Buying a dip is risky as no one knows how long the market will stay.
The most critical thing you should do is remain calm and assess the situation. Think of the long-term effect of this crash on your crypto trading career, and decide what the best move is.
Also read: Top 5 Cryptocurrency
Despite the potential dangers and volatility of the cryptocurrency industry, you’ll reduce the effects of the risk if you come prepared. So make sure to do your research to make a clear decision on which crypto you would invest in, how to progress your career, and what’s the best thing to do when faced with challenges such as a crypto crash.