Gains and losses, ups and downs are two realities of most financial markets. Crypto markets are also not untouched from these realities. However, the volatility in these markets is much more than the volatility of other financial markets. And it’s because of this volatility that often people realize quite later in the cycle that the market has entered a bear phase. Once a prolonged bear phase has begun, there’s hardly anything that one can do except for wondering why crypto market is down from such a long time (which is what has happened in the recent days).
But it turns out that these prolonged bear phases can be avoided if one keeps an eye on certain factors that lead to these phases. In this article we’re going to take a look on 3 such factors that lead to prolonged downturns in crypto markets. Let’s begin:
Regulatory uncertainty is one of the biggest factors that keeps influencing the prices of cryptocurrencies. And it will continue to be like that until the legal status of cryptocurrencies is finalized in all major economies. This has been proven time and again. For example, when RBI had implemented a banking ban on cryptocurrencies, the markets had crashed sharply. Similarly, when China had banned cryptocurrencies, the markets had gone down by 29% within 24 hrs. If a similar move comes from any of the western countries at any point of time (there’s uncertainty in many European countries), it can have a much worse effect on the global cryptocurrency scene. Therefore, you should keep an eye on global developments related to cryptocurrency regulation in major economies. Often the stringent measures from regulators come after a number of warnings, so there’s a good chance that you can escape a prolonged bear phase caused by regulatory moves. Just keep your eyes and ears open.
After regulators the second major forces that can make or break any market are exchanges. It has been proven not just in cryptocurrency market but also in other financial markets. If a major cryptocurrency exchange is hacked, or goes bankrupt due to poor financial management, it can throw the entire cryptocurrency market in turmoil. It has already happened actually, and we can present at least 2 recent examples of this:
- When Bithumb was hacked recently, it led to the entire cryptocurrency market losing billions within minutes.
- When Mt. Gox exchange was hacked in 2014, it used to account for 70% of global cryptocurrency trading volume. Then it was hacked, it filed for insolvency and a bear phase started in which crypto markets lost about 80% of their value.
If any major exchange suffers from similar fate again, there’s no doubt in the fact that it can lead to another massive crash in global crypto markets. Now, the hacks are unforeseen events that can’t be predicted, but poor financial management can often be seen before a company files for bankruptcy. You just need to keep an eye on financial statements of major exchanges and keep a track of important financial figures to figure out how major exchanges are performing overtime.
While it’s a well-established investment advice that people should not allow their emotions to control their decisions, it’s also a fact of the world that public perception makes or breaks things. This happens in crypto markets too. When negative publicity grows from a steady pace and exceeds the level of positive publicity, the markets usually go in a downturn for long time. If one can sense the growing negative publicity early on then probably a big loss can be avoided.
Regulation, exchanges and media are 3 of the biggest factors that affect any market, including crypto markets. The influence of these factors in crypto space is much more than it is in any other financial market, so if you can keep these 3 factors in mind at all times while taking your trading decisions there’s a good chance that you won’t be stuck in a prolonged bear phase wondering why crypto market is down. Happy trading!