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April 25, 2022

What causes crypto markets to crash?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Recently, you probably asked yourself - why are crypto markets so volatile and what causes the price crashes when they happen?

To understand in more detail what is going on, we need to understand two things: Why crypto markets are more volatile in general, even in good times, and secondly, what triggers the bad times.

So, first: Why is crypto one of the most volatile assets? While not always the case, it tends to move up and down in price more extremely than other investments, such as stock. The reason is because it’s a purely speculative investment - crypto is still not adopted widely in real life, and investors simply hope for its future success. That means any doubt in crypto has big impacts. Contrast that with an investment in a company like Microsoft, that makes real products, owns real stuff, and has an established business - their price moves less because there is at least some guaranteed value there. 

So, now that we understand that crypto generally swings more wildly in price, what actually causes the bigger crashes? Usually that is driven by the larger economy. When the stock market has a bad day, investors will generally try to sell things they own. And since crypto is the riskiest investments they have, it’ll usually go first. Combine lots of sellers with few buyers and things go down quickly.

And there you have it - when things are not well with crypto prices, take a look at the general economy. It’s likely the culprit.

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