Why Are Cryptocurrencies Dropping?
The cryptocurrencies recently showed a sharp drop in their prices in a very short period. Bitcoin (BTC) the biggest player in the market of cryptocurrencies dropped below $10,000. Ethereum’s Ether (ETH), the next to BTC in the market, also dropped by almost 10% during the same period.
Despite the upcoming return of the bull market, audiences are always interested in reasons behind sharp drops. Well, there are some general reasons that always keep the pressure on the prices of cryptocurrencies. Besides that, there are some specific reasons attributable to the recent drop in their prices.
Why do cryptocurrencies drop in general?
#1. Influence of Global Market
Despite efforts, cryptocurrencies are still not able to decouple themselves with the global market. The sentiments prevailing in the market do influence the prices of cryptocurrencies.
#2. Nonacceptance by Financial Institutions
The other reason is the lack of acceptance of cryptocurrency by the financial institutions. It seems that going forward only big financial institutions can make profits from the cryptocurrency model.
#3. Stringent Regulations
The regulations around cryptocurrencies are still not soft. These stringent regulations certainly choke the growth prospects of cryptocurrencies. Besides, these regulations also do not let the players innovate and develop newer designs to respond to market needs.
#4. Lack of trust
This is possibly the biggest reason why cryptocurrencies are not able to sustain the momentum. Many individuals invested hugely in different cryptocurrencies and unfortunately lost heavily on their investments. The reason for their losing money was either their unjustifiably high investment or their getting trapped in a scam. Irrespective of the reasons, it eventually dented the trust of the public, at large.
#5. The vicious circle of trust and regulations
The scams and hacks associated with cryptocurrencies prompt many States to make more stringent laws which in turn resist the growth of the currencies. On the other hand, in the absence of law, there is an increase in the incidences of fraud that shakes the trust of the investors and thus hampers the growth.
Why Were Cryptocurrencies Dropping Recently?
#1. Global Market Situation
The coronavirus pandemic has severely impacted the global market. Besides, there have been many international geopolitical conflicts, as well, which are resisting the quick recovery of the market in recent times.
The sudden drop in oil prices and the international conflict over oil prices between Russia and Saudi Arabia have affected the market sentiments a great deal. There is an atmosphere of uncertainty and the investors have put their investment plans on a hold until these clouds of uncertainty disperse from the skies of the global market. A drop in the prices is also a symptom of the same environment of instability and apprehension experienced by the investors.
#2. Selling by the miners
This is probably one of the major reasons for the present drop in cryptocurrency prices. Bitcoin miners along with the traders, in particular, seem to have taken off the risk by selling a part of their currencies. Miners usually sell the rewards that they receive to keep the network of the blockchain secure. You can see the changes in bitcoin’s price from 07/18/2010 to 09/29/2020.
It is evident from the fact reported by some of the reporting agencies regarding the extraordinary transfer of bitcoins released for exchanges for a potential sale a few days back. The elevated exchange usually is a pre-indication of high pressure on selling in the near future.
Sometimes it also is an indication of the battle between the miners. Some miners are interested in the price rally of cryptocurrency while others resist that. This war is prompted by those who have received handsome returns on their investments and want to stop competition in the market.
#3. Decentralized Financial (DeFi) Exchanges
#4. Why are DeFi exchanges in a more advantageous situation?
The DeFi exchanges are not bound by as many regulations as the centralized exchanges like cryptocurrency. Centralized exchanges need to fulfill the Know Your Customers (KYC) requirements and in addition, have to pay listing fees. On the other hand, the DeFi exchanges not only offer benefits of relaxed regulations but also charge a minimum to list new tokens.
This is allowing them to pull many new projects for listing and the users are showing a lot of interest in investing with them for increased yield farming opportunities. Such fast, quick, and widespread popularity of DeFi has blocked money movement towards the centralized cryptocurrency exchanges. The centralized exchanges are thus facing a huge liquidity problem and thus can’t lure their existing and new investors with high returns in a quick time. Besides, centralized exchanges are benefitted by bringing down the prices of cryptocurrencies to build up their user base.
#5. A vicious circle of liquidity and returns
This has created a vicious circle of liquidity and returns, which is fast eroding clientage of cryptocurrency. More and more investors are selling their cryptocurrencies in the direct exchanges and moving towards DeFi exchanges.
Whales seem to set the rule of the game between the decentralized and centralized exchanges. Many cryptocurrency players have now responded to reverse the trend by offering free token for new listings. This a positive step towards maintaining their liquidity and retaining customers. The unrealistic yield farming in the DeFi scenario has already started raising doubts in the minds of serious users,” Is it real or a new bubble to burst in due course of time?”
With the economic activities resuming after the lifting of lockdown, the Global Economy is expected to come back on track sooner than later. Positive responses from the direct exchanges coupled with the doubts about the yield farming may once again pace up the growth of cryptocurrencies to see their prices moving North.
About the Author.:
Ravi Kumar is the Co-founder at XplorMedia, a digital marketing agency in Delhi and also editor at WHRX. Ravi has a uniquely wry voice that shines through in his newest collection. He writes on Digital Marketing, UI/UX, Web Hosting, and Other New Technologies.
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