5 Reasons Why Crypto Market Collapsed Again
RegulationBit News Today2 min read
Another wave of selling hit crypto markets, causing a sharp drop in prices for major coins. The total crypto market cap fell to under one hundred billion dollars for the first time in two months. Several large cryptocurrencies are down by double digit percentages in value.
While the specific triggers are unclear, several factors may be behind the collapse: ## Regulatory Uncertainty
Regulatory news continues to weigh on the market. In the U.S., the Securities and Exchange Commission (SEC) is increasing scrutiny on crypto platforms and coin offerings. The SEC has subpoenaed several exchanges to investigate if they have been trading unregistered securities.
Recent comments from SEC chairman Jay Clayton indicate the regulator sees most crypto as securities subject to federal laws. This has contributed to uncertainty and volatility. ## Lack of Trading Volume
Trading volumes remain relatively low on most exchanges, creating an market ripe for large price swings. When a selloff hits, there may not be enough buy orders to absorb the exits, amplifying the downward pressure.
Trading volumes have been falling in recent months as many major cryptocurrencies have dropped from their December highs. Until volumes pick up again, the market will likely remain volatile. ## BTC Futures Expirations
Several cryptocurrency futures contracts expired in recent weeks, which may have contributed to the downward price pressure. When futures contracts expire, traders have to either roll their positions into new contracts or close out and settle. This can lead to extra selling and market churn.
Bitcoin futures on leading exchanges like CME and CBOE have relatively low open interest compared to stock index and commodity futures. As a result, the impact when they expire can be more pronounced for the crypto market. ## Market Structure Shifting
Further, a shift in market structure has likely contributed to increased selling pressure. As the total number of active crypto users has grown, so has the share of the market driven by more risk adverse investors and short-term traders. This shifts the dynamic from a market that could tolerate relatively large corrections, to one that experiences sharper, more punishing drops.
As more retail traders flood the market, the structure has become more polarised between longtime holders and speculative short-term traders. This feeds into a cycle of panic selling on large corrections, which in turn drives more volatility. ## Other Contributors
Other factors, like complexity around new regulations, and ICO refunds also likely contributed. Some exchanges are struggling to manage the high trading volumes while regulators are still trying to sort out oversight. As such, this added friction is slowing things down.
Additionally, refunds from scams and failed ICOs are likely being dumped back into the market, adding pressure. Many other recently issued tokens are down sharply as well.
When one coin tumbles hard, it can drag others down as risk averse traders sell everything and safe-haven buying disappears. That contagion effect is likely contributing to the carnage across the board. ## Recipe for Volatility
The combination of regulatory uncertainty, lack of trading volume, contract expirations, and market structure shifts, along with other factors, are likely behind the latest collapse. Unfortunately, until some of those factors resolve, the volatility looks set to continue. Crypto traders should monitor the situation closely in the coming weeks.
