The world of cryptocurrency is known for its wild price swings. While these fluctuations can happen at any time, many experts point to a curious trend: crashes seem more frequent on weekends.
This weekend’s vulnerability could have a significant effect on the future of cryptocurrency regulation.
Let’s look at the different reasons why your favourite digital coin might experience a downturn when the workweek ends.
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Reason 1. Trading Slowdown
Picture a busy marketplace filled with people buying and selling goods. Now, imagine that a big chunk of the crowd suddenly vanishes, leaving only a few people behind. This smaller group now has a much bigger influence on the overall buying and selling frenzy.
A similar thing happens in the cryptocurrency market during weekends. Since traditional banks and financial institutions are closed, trades significantly decrease.
Amin Shams, a finance professor at Ohio State University, explains that this lack of activity can amplify the impact of even small trades. When there are fewer buyers and sellers, a cryptocurrency's price becomes more susceptible to sudden movements, potentially leading to crashes.
Reason 2. Bank Closures
Stephen McKeon, a finance professor and cryptocurrency investment expert, points out another factor related to bank closures.
Cryptocurrency exchanges often require investors to have funds readily available in their accounts to facilitate trades. With banks shut down on weekends, some investors may be unable to quickly transfer money, hindering their ability to react to market fluctuations.
This can lead to “panic selling” moments, where investors fearing a downturn offload their holdings, further driving down prices. Typically, a rebound occurs on Sunday night and Monday morning as Asian and U.S. banks reopen, allowing investors to re-enter the market.
Reason 3. The Musk Effect and the Power of Influencers
High-profile figures like Tesla’s CEO Elon Musk can spark significant changes with a single tweet. If Musk were to post a negative comment about Bitcoin outside of regular market hours, it could trigger a wave of selling activity before investors regain access to their accounts on Monday.
This highlights the crypto’s unpredictable nature and dependence on external factors, which can be more impactful during weekends with lower trading volume.
Reason 4. Trading on Margin
Margin trading is a way for investors to borrow money from exchanges in order to buy more cryptocurrency. It’s a strategy that can boost potential profits, but it also comes with a lot of risks.
Here’s how it works: When the prices of cryptocurrencies drop below a certain point, investors who have used margin trading may get a “margin call.” This means they’re required to pay back the loan they took.
The problem is that during weekends, they might face difficulties accessing their bank accounts to repay the loan. In such cases, the exchange they borrowed from might be compelled to sell off the digital assets they hold in order to get back the money they lent. This forced selling by the exchanges can worsen the drop in prices over the weekend.
Reason 5. Market Manipulation
The possibility of market manipulation adds another layer of complexity to the weekend crash phenomenon. Studies suggest that tactics like “tether manipulation” might have artificially inflated cryptocurrency prices in the past.
Tether, a digital currency pegged to the U.S. dollar, could have been used to create a false sense of demand for other cryptocurrencies like Bitcoin. While the extent of such manipulation remains unclear, some believe it could be a contributing factor to weekend price swings.
Spoofing, a tactic in which fake buy or sell orders are placed to influence supply and demand, might also play a role. However, the lack of conclusive evidence makes it difficult to determine the impact of manipulation on weekend crashes.
Reason 6. Crypto ETFs
Cryptocurrency’s weekend crashes pose a challenge for regulators considering the approval of crypto-based exchange-traded funds (ETFs). Unlike cryptocurrencies, ETFs typically trade during regular market hours, creating a potential mismatch for investors holding crypto ETFs.
If a significant price drop occurs over a weekend, investors might be unable to sell their ETF shares until markets reopen on Monday, potentially suffering losses. You will be able to learn this when you learn how to read crypto signals.
This highlights the need for stricter regulations and investor protections before widespread crypto ETF approval can occur.
Wrapping Up
The vulnerability of cryptocurrencies during weekends is a worrisome issue that raises concerns about the stability of the overall market. Regulatory bodies, such as the Securities and Exchange Commission (SEC), are currently reviewing applications for Bitcoin and Ethereum Exchange-Traded Funds (ETFs).
Finding a solution to the problem of weekend crashes will likely play a significant role in shaping the future of cryptocurrency regulation. For now, it’s important for investors to be aware of the increased risks and implement appropriate risk management strategies to safeguard their investments.
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