Is all crypto’s value dropping at the same time? We have seen this phenomenon of crypto drop quite often, and we can see there is some type of correlation among them.
In 2022, when the crypto market saw a massive downfall, every crypto was in the boat that sank, including the stablecoins that were supposed to remain ‘Stable’.
As the adoption rate of crypto continues to grow, its sync with the stock market has also risen.
It’s important to note that some cryptocurrencies are intentionally pegged with fiat currency, stocks, or commodities like gold and silver, so naturally their valuation is in sync with the currency or commodity they are pegged to.
Why do all Cryptos Drop at the Same Time?
The interconnected nature of cryptocurrencies creates a sync among all of them, causing similar price fluctuations among them, whether it’s a crypto drop or a rise.
This does, however, reduce the diversification option for the investor, as they can’t recover losses if every crypto drops at the same time.
Reasons Behind All Cryto Drops at the Same Time
There are at least five major factors behind this phenomenon, namely:
Same Category
All cryptos have a high correlation among them as they belong to the same category and are subject to the same market forces and investor sentiment that drive their profitability and losses.
Duopoly of Bitcoin and Ethereum
Bitcoin and Ethereum are the two biggest cryptocurrencies by market cap, and together they create a dominant effect on the crypto market.
The price movements of the two do affect the prices of other cryptocurrencies and the market as a whole.
Bitcoin alone has the power to create a domino effect on small to mid-scale crypto coins, meaning if Bitcoin loses value, then they will lose it too.
Contagious Ripple Effect
Cryptocurrencies have interconnected networks and infrastructure. So if one crypto coin or exchange faces any security breach or issue.
Then it will create panic and fear among investors, leading to the withdrawal of the investment across the market.
This is called the ripple effect, where the downfall of one crypto coin will trigger the downfall of the other coins as well.
Uncertainty of the Economy and Regulations
Whether the economy is in recession or boom surely affects the valuation of crypto coins altogether as people avoid investing in a recession and invest more in a boom period.
Even slight changes in regulations, like increasing the tax deducted at source for the income from crypto, could demotivate investors from investing any money at all.
Since the crypto market is highly volatile, it’s at the top of the list where people either avoid investing in these two situations or rush to liquidate their crypto assets, leading to a crypto drop.
Psychology of Investors
Fear of missing out is a very important factor that determines the bearish or a bullish run of the crypto coin and the market as a whole.
A slight drop in the price of a crypto coin can trigger panic among investors to liquidate their crypto holdings, which further pushes the prices down.
This herd mentality of FOMO creates high short-term growth that ultimately leads to a decline at a rapid phase.
Leverage and Margin Trading
Crypto exchange platforms offer leverage and margin trading that allow users to borrow funds to secure their positions.
This can worsen the price fluctuations if the market turns bearish.
Furthermore, widespread liquidations by investors caused by margin trading can also contribute to the downfall in crypto prices.
Pegged Crypto Coins
Pegged cryptocurrencies are those that have intentionally linked their value to a particular fiat currency, like US dollars, or commodities, such as gold.
The main objective of ‘Pegged Price’ is to maintain the valuation of the crypto coin on similar levels as the fiat currency or commodity it is pegged to. By doing so, it helps to bring down price volatility.
However, if the valuation of fiat currency or gold itself goes down, then the valuation of the crypto coins pegged to them will also go down.
Crypto Coins Pegged to the US Dollars
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
Crypto Coins Pegged to the Gold
- Paxos Gold (PAXG)
- Tether Gold (XAUT)
- DigixDAO (DGX)
What Should I do if a Crypto Drop Occurs?
- Calmness and Situation Assessment: One can only think clearly when he maintains calmness, even in tough situations. Panic selling if the valuation of the crypto drops can cause losses.Moreover, assessing the overall market situation is also quite important to safeguard the investment objectively.
- Revise Investment Strategy: It’s better to keep updating the investment strategies from time to time to fit in the dynamic and volatile crypto market.Evaluate whether current market conditions synchronize with your investment strategy.
- Diversify Portfolio: Diversification is a basic but important step in risk management strategy that covers losses to a good extent to minimize them.Invest in stablecoins, traditional stocks, etc. that help mitigate losses and reduce the overall volatility of the portfolio.
- Market Trends: Keep a close eye on market trends and news because cryptocurrencies in particular are really affected by positive or negative news.Similarly, keep up to date with any security breaches or crypto whales using unfair means to fluctuate prices.
- Exit Strategy and Stop-Loss Order: It is essential to have an exit strategy in place even before investing.Implement a stop-loss order that automatically triggers a sell order if the valuation reaches a certain price set by the investor.
Conclusion
We have covered factors affecting crypto drop meaning how prices of most of the cryptocurrencies can drop at the same time as well as the role of ‘Pegged Cryptos’.
Also, mentioning steps to avoid or reduce chances of losses in case a crypto drop does occur on widescale.
Frequently Asked Questions
Q: What is a crypto drop?
A: A crypto drop refers to a sudden decline in cryptocurrency prices.
Q: Why do crypto drops occur frequently?
A: Crypto drops can occur due to various factors such as market volatility, regulatory changes, or negative news impacting the crypto industry.
Q: How do crypto drops affect investors?
A: Crypto drops can lead to significant financial losses for investors who hold or trade cryptocurrencies.
Q: Can crypto drops be predicted or prevented?
A: Predicting crypto drops is challenging, as they are influenced by numerous unpredictable factors. However, risk management strategies surely can minimize potential losses during drops.
Q: Are crypto drops permanent or temporary market fluctuations?
A: Crypto drops are temporary market fluctuations, and prices can recover or stabilize over time. However, the duration and quantity of the recovery may vary based on market conditions and external.
Greetings, I’m Akriti Gupta, a recent graduate from Delhi University. My pursuit in life revolves around an insatiable curiosity to explore and acquire new knowledge, fostering personal growth while nurturing a sense of compassion and goodness within me. Among my passions, painting, calligraphy, doodling, and singing stand as the cornerstones of my creative expression. These hobbies not only serve as outlets for my imagination but also as mediums through which I continually learn and evolve.
