The fall of cryptocurrencies. Is there a connection in the fall of bitcoin and other virtual currencies?

Bitcoin (bitcoin) is the most famous cryptocurrency in the world. More than ten years have passed since the appearance of bitcoin on the market, and during this time bitcoin made a splash, actually creating the cryptocurrency market and changing the digital world. After him, other digital coins appeared, but it was Bitcoin that was the first. 

At present, the level of Bitcoin capitalization exceeds half of the entire electronic money market. It is the bitcoin rate that affects other electronic currencies. Bitcoin either sets records in its price, then breaks anti-records (for example, in 2017 the price of bitcoin increased almost 20 times, and then fell sharply by almost 90%), and the rate of digital money rises and falls following bitcoin. In this article, we will try to understand the causal relationships, and also find out what factors have a direct impact on the rate of Bitcoin and other digital currencies.

What affects the rate of cryptocurrencies

There is nothing surprising in the constant fluctuation of cryptocurrency rates. Unlike stocks or assets, virtual money has no real value for money. If for the shares of a company the main indicators of activity are the number of consumers of goods or services, the cost of means of production, patents, etc., and in the case of mineral resources - the amount of extracted resources, the amount of reserves and fluctuations in demand, then in the case of cryptocurrencies the situation is completely different ... Here, only two factors affect the level of the exchange rate - net supply and net demand, and this makes the situation completely non-standard. 

Of course, you can calculate the approximate amount of hardware used, the electricity spent, the total number of man-hours spent on the maintenance process, and thus find out the real average mining price, you can also establish the real payback of the ASIC processor, but all these indicators will be only approximate. The main indicators affecting the exchange rate are the level of supply and the level of demand.

So why is the cryptocurrency rate declining? Which behavior would be correct? What is the relationship between Bitcoin and other cryptocurrencies? Lets try to figure it out.

The relationship between falls in the rate of bitcoin and other cryptocurrencies

            It is obvious that any changes in the course of top cryptocurrencies have a direct impact on the overall digital finance market. The reasons for fluctuations in the rate may be different, but traders will still observe the rate of the most popular cryptocurrencies.

The leader of the digital market, bitcoin, has experienced unexpected ups and downs since its inception, but despite all the difficulties, today it is the most stable digital currency, the cost of bitcoin as of the beginning of 2020 is about 7100 US dollars. 

When Bitcoin entered the market in 2014, it cost hundreds of times less, and for the next three years its price remained relatively low, but stable. However, in the wake of the popularity of cryptocurrency in 2017, bitcoin grew rapidly, and it was in 2017 that young and inexperienced investors came to the cryptocurrency market. 

After the breakthrough of 2017, bitcoin no longer had such sharp fluctuations in the rate, and today its price is relatively stable and far from record indicators. There are several reasons for the fall in the price of bitcoin and other currencies:

• the usual decline in the market value of all currencies by the end of the calendar year;
• inexperienced traders selling assets in a panic after minor changes in the rates of top cryptocurrencies;
• the psychological effect that affects traders more than any technical characteristics.

Why is the rate of cryptocurrencies declining?

The reasons for the fall in the rate of the digital currency can be different, they can be conditionally divided into technical, market, economic and political, psychological and moral and ethical. For a more accurate understanding, we will analyze each of the reasons separately.

            Technical reasons

1. Forks (using the code base of a software project as a basis for the next). In cases where a hard fork is better than its predecessor, a sharp decline in the rate of the latter is possible, especially if it had disadvantages that interfere with normal use. But if the new fork does not justify the expectations, its rate falls, since the investors prefer the old projects known to them, with the shortcomings of which they are already familiar.
2. Hacker attacks and numerous hacking attempts, as well as successful penetration into the network of a certain currency or a separate exchange. Even an unsuccessful attack on any service can provoke a sharp drop in the cryptocurrency rate: users are afraid of losing their savings and therefore try to sell vulnerable coins as soon as possible.
3. Loss of advantage, for example, in the case when there is a currency with a high level of privacy, but another currency is issued that offers an even more secure degree of encryption. In this case, the first currency is likely to drop sharply due to the loss of leadership, and, accordingly, the second one will immediately take top positions, displacing a competitor. It is worth noting that the cryptocurrency may well lose its advantage even in relation to the previous version of itself, which sometimes happens during modernization.

            Market reasons

1. Domino Effect: In the global cryptocurrency market, it is quite common for unpopular currencies to fall following popular ones. Such a relationship is often observed with a fall in bitcoin: after a decrease in the price of this currency, the value of other currencies falls, even though only bitcoin can have objective reasons for a decline in market value.
2. Dumping (from English - reset): a situation when traders, for the purpose of profit, form a situation for an artificial collapse of the market price of a cryptocurrency. The essence of dumping is mainly in the sale of a large amount of currency in order to create panic among inexperienced investors.
3. Overheating or oversaturation of the crypto market: if a digital currency increases its value for a long time and steadily, then we can expect that over time its popularity will begin to decline, and, accordingly, prices. In such situations, an increase in the price of a currency is unjustified, and the inertia of the increase in value over time stops, like any other inertia.

Economic and political reasons

1. Various bans and vetoes put forward by countries in relation to cryptocurrency, for example, bans on the purchase and sale of digital currency, on exchange, investment and mining. In some states, there is a complete or partial ban on the use of cryptocurrency, for example, in China, any financial actions with cryptocurrency are prohibited to banks, but are allowed to individuals. The more a particular country plays in the world arena, the more severe the collapse of the exchange rate can occur due to the introduction of the ban. In addition, if we are talking about a large country, a sharp drop in the rate of a digital currency can be regarded as a harbinger of a possible introduction of prohibited measures in relation to cryptocurrency.
2. The introduction by financial authorities (stock exchanges, banks, etc.) of various restrictions and limits, and the larger and more influential the structure that introduces restrictions, the more the market value of the cryptocurrency will decrease.
3. Negative statements by famous traders, financiers, experts and bankers about the current state of the crypto market. Often, forecasts by an expert about a decrease in the value of a certain digital currency can cause a real drop in its price. This is due to the fact that the owners of this currency begin to get rid of it in a hurry, which provokes panic and a decline in prices. 

Psychological reasons

1. A simple human factor cannot be disregarded, i.e. rumors and gossip that arise both for natural reasons and artificially launched. Sometimes there are no objective reasons for a fall in the rate of a cryptocurrency, but there is a distant rumor about the situation in the market, a discussion begins among the ignorant cryptocurrency owners, and in the wake of a wave of panic, the holders decide to get rid of their crypto savings.
2. Too high volatility (regular changes, volatility of the situation in the cryptocurrency market): often the cryptocurrency rate is unstable, and when significant rate jumps begin, some traders cannot withstand the stress and leave the cryptocurrency market.
3. Too high expectations, and as a result, disappointment. For example, a large number of depositors came to the crypto market in the winter of 2017, when the bitcoin rate began to grow rapidly, but with the fall in the rate, many young depositors were disappointed and sold all the previously purchased currency. In fairness, it should be noted that a similar situation repeats almost always after a rapid rise in the price of a cryptocurrency, when the growth ends and the stage of systematic attenuation begins.

Moral and ethical reasons

1. Information about possible fraud or deception: if this becomes known, then the rate of a certain currency falls depending on the number of deceived traders or investors. The response of the development team (or other responsible persons) is extremely important here, the reaction of the trader society directly depends on their actions, and, accordingly, the level of supply and demand for a particular cryptocurrency.
2. Unethical methods of obtaining finance from depositors, for example, deliberately deceiving participants in an affiliate program (referrals), or the receipt of a previously hidden batch of digital currency on the crypto market. Such actions have an extremely negative impact on the cryptocurrency market.
3. The development teams neglect of possible system vulnerabilities or any other problems. Indifference on the part of developers causes investors to sell their savings, and, of course, after such sales, the exchange rate drops significantly.

In the global cryptocurrency market, unlike the traditional one, depositors are less tolerant of sharp drops in the exchange rate, the reason is the instability and unreliability of cryptocurrency assets in comparison with the conventional foreign exchange market. In addition, it is worth mentioning the young inexperienced investors who came to the digital market in the wake of its high popularity. If in the traditional foreign exchange market experienced traders, in the event of a fall in the rate, act according to a previously developed and carefully thought out algorithm, then young investors from the cryptocurrency market most often begin to panic and sell coins even with natural fluctuations in the rate. In the case of unpopular currencies, which are relatively few in circulation, a large sale of even one investor can have a direct negative impact on the general rate.

Differences between temporary depreciation and unpromising fall

In the modern cryptocurrency market, rate jumps are quite common. Experienced investors already know how to behave, new traders learn from mistakes or drop out of the game. But when the price of a certain currency suddenly begins to fall, you need to determine the reason for what is happening and understand whether positive dynamics is possible. Certain types of digital money are subject to seasonal or situational jumps, while others fall hopelessly without hope of restoring their previous positions. 

Of course, it is impossible to give the most accurate forecast, but there are certain criteria and parameters by which one can almost certainly predict the future of a particular cryptocurrency. Lets list a few points to which world-renowned traders are advised to pay attention:

1. The true value of the currency. Digital currency has become popular for a reason, if it is in demand, it will sooner or later return a high value. Experienced traders are well aware of this, therefore they are in no hurry to part with certain types of coins, confident that their value will recover over time. However, with a cryptocurrency that has no real value, the situation is the opposite: most likely, after the start of a fall in the rate, it cannot be stopped and the currency will lose all its positions without the possibility of recovery. Sometimes an unsupported currency still returns a high value, but only if it is artificially “inflated”.
2. Competitors. If on the crypto market two currencies have the same position in all areas, then upon completion of a possible fall in value, the most promising coin in its area will most likely begin to grow, and the currency that has not withstood the competition will continue to lose value and, as a result, the best currency will occupy the resulting niche. 
3. Development prospects. If the development team can influence the reasons for the depreciation of the cryptocurrency, then their actions will be decisive in the future fate of the coin on the market. For example, the blockchain was attacked and hacked, as a result of which the exchange rate fell. If the development team responds to the hack as quickly as possible, and then builds up reliable protection and presents the methods used to the public, then the currency will have a real opportunity to regain its position in the market. And vice versa: if the developers show indifference to such events or provide only vague promises, then, most likely, the currency will continue to fall.
4. Bulk buying on the crypto market. If the cryptocurrency falls, but at the same time offers to buy appear, then, most likely, traders will be able to change its course for the better. All offers to buy are, in principle, a positive indicator for any cryptocurrency, indicating that the main reason for what is happening is speculative actions. Experienced traders hope for an increase in the value of this currency and try to buy it as much as possible, while it is not so expensive to sell it after the appreciation and make money on it. 
5. Particular attention should be paid to currency analytics and feedback. If the trading community claims that any cryptocurrency is a scam (fraud, deception), then most likely it is. In such situations, it will be correct to trust the opinion of others. If the rate of the scam currency has fallen, it is unlikely to rise in price. Sometimes, if the topic of a certain currency is not being discussed too violently, and it is in the top, then before it finally falls, it may well grow several more times, and you can earn extra money on these races. But it should be remembered that someday the value of this cryptocurrency will fall completely. 
6. The popularity of cryptocurrency. The most popular cryptocurrencies most often fall slowly, and little-known cryptocurrencies are rapidly losing value almost all the time and very rarely return past positions. Popular coins are in the hands of more owners, many of whom simply do not believe in negative predictions about their investments, and this is why they are less likely to sell off their savings. With the less popular currency, the situation is completely opposite: there are much fewer owners, and they are more often ready to part with their crypto investments without regrets.

In the process of assessing the prospects for the development of the course of any cryptocurrency, it is imperative to study the graphs of fluctuations in its rate: if the cryptocurrency dropped in price at a certain frequency, but then returned positions or even exceeded the previous maximum value, then, most likely, this will happen in the future. 

However, one should not forget that no expert, analyst or trader can give an accurate forecast. 

Actions in case of a fall 

When it comes to cryptocurrency rate jumps, investors are only concerned with one question: is it worth waiting or its time to sell the currency. Unfortunately, it is impossible to give a definite answer, the solution will be different for each individual case. The owner of the cryptocurrency must understand that by selling coins, he will further reduce the rate. In addition, the less the popularity of a certain cryptocurrency and the lower the level of its capitalization, the more significant the impact on the rate of each of its sales. 

Waiting strategy

One of the advantages of a wait-and-see tactic is that, due to its volatility, digital currency is in a winning position much more often, this is especially true for top cryptocurrency giants. There is no single correct algorithm of actions on the crypto market, it is better to listen to the recommendations of experienced traders. Most experts believe that waiting in the hope of an increase in the cryptocurrency rate is possible in the following cases: 

• it is a truly promising digital currency, it has real value and is actively supported by developers;
• it is a top cryptocurrency, the value of which has decreased due to bans, sanctions or the destabilized economy of the traditional fiat currency market;
• it is a promising cryptocurrency, the value of which has decreased due to falling prices for top currencies or due to general instability in the cryptocurrency market;
• the true value of the currency is clear, but the possible reasons for the sharp drop in the rate are not; in such situations, the course can return to its previous positions as quickly as possible.

With almost one hundred percent certainty, we can say that in such situations, the likelihood of the return of its former positions in the cryptocurrency is quite high.

            In addition, it is useful to learn how to determine how valuable a particular asset is as a market instrument or how technically advanced it is, and, accordingly, draw conclusions about its real value from this. In situations where the currency is really significant, it is necessary to wait out the fall in the rate, the previous value will return sooner or later. And vice versa: in cases where the currency has no special value, you need to be extremely careful when its rate falls, most likely it will not restore the maximum price.

Sometimes, not the top-end cryptocurrency falls after the general market decline, and the subsequent market growth will stimulate its growth. If an insignificant asset begins to fall by itself, you need to very carefully assess the reasons for the fall and calculate the further algorithm of actions.

Nevertheless, the survival strategy has its drawbacks, for example, when a trader misjudged an investment, or did not take into account any small but important factor that would later provoke an unexpected depreciation. In this case, the longer the depositor waits, the more finance he will lose.

Selling cryptocurrency

Situations when the cryptocurrency begins to lose value can be irreversible, and in such cases significant financial losses are inevitable. Therefore, it is important to know when to sell a losing cryptocurrency.

The falling assets should be sold if:

1. The cryptocurrency rate is regularly and steadily declining, and there is no hope that the fall will be stopped and the coins will return their value.
2. The cost of a cryptocurrency exceeds the purchase price of a depositor, in which case there is a possibility that when the rate decreases, it will break through this mark too.

            In the first situation, one should analyze the growth prospects, and if they really do not exist, sell the currency as soon as possible, the main advantage here will be the almost complete return on investment. But there are no one hundred percent guarantees, the investor may simply incorrectly assess the current situation and the cryptocurrency will go up again after the decline. 

            In the second situation, it is necessary to get rid of assets if there is complete confidence that the price will fall below the purchase price, as well as in the case when the investor does not want to risk and is ready to get less income rather than run the risk of more serious losses. In this case, the situation is a little more complicated: if the cryptocurrency finally loses value, then the trader will undoubtedly win. If the coin, having fallen below the purchase price, starts to grow again, you can buy it again and avoid losses. However, if the rate does not fall to the purchase value, but starts to rise again and exceeds the price, then the trader will be in a losing situation. Of course, the advantage of such a step is that here the trader will be in the black in any case (bought at a lower price and sold at a higher price), but there is also a minus - a good speculative mechanism and a source of profit will be lost.

How to make money on the fall in the rate of cryptocurrency

In addition to waiting or selling cryptocurrency savings, traders have another promising solution: making money on the depreciation. The strategies used in such cases depend entirely on the currency and the reasons for the depreciation. 

For example, if we are talking about a top currency like bitcoin, the rate of which is influenced only by global situations, traders can start selling it to artificially lower the rate. After the price drops to an acceptable level for investors, they start buying it and the cryptocurrency rises in price again. According to this scheme, the process of making money on the races of the rate of many top cryptocurrencies occurs. 

If we are talking about a currency of average popularity or a little-known one, then traders with large financial assets can almost completely subjugate the process of depreciation. It should be noted that some caution should be exercised here so as not to provoke an uncontrolled fall, which would entail the loss of their savings by traders.

Sometimes well-known traders sell digital finance at the time of their decline and begin to track the fall in the rate: upon reaching the minimum value, the trader decides to buy and purchases the currency at actually the lowest price, because of his actions, the rate starts to rise again and the trader makes money on it.

Of course, such manipulations cannot be considered ethical, but such games with the course can bring colossal income.

Summing up

Having examined in detail the aspects of cryptocurrency rate fluctuations, we saw that the digital market is an integral organism. Almost every trader takes an active part in its formation, and the rate of top currencies has a significant impact on the entire crypto market.

In conclusion, I would like to note that more often the fall in the rate of cryptocurrencies does not indicate the problems of the digital market, but, on the contrary, is an indicator of the process of its formation. Sometimes the cryptomarket suffers from a lack of currency (during hacker attacks, hacks and other problems), but these troubles are eliminated with the help of a hard fork, system modernization, and new technical solutions.

In addition, we recall: the fall in the rate of the cryptocurrency is not a problem for an experienced trader, he can react in a timely manner to the situation on the market and make good money on it.