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What is a Crypto Death Spiral?

A Death Spiral is a phenomenon in the cryptocurrency market where the price of an asset drops rapidly, triggering a chain reaction of negative consequences that further exacerbate the decline.

This term is often used to describe critical situations related to mining, stablecoins, or other aspects of the ecosystem.

Main scenarios of a death spiral:

🔵 Mining Death Spiral:

Occurs when the price of a cryptocurrency drops to a level where mining becomes unprofitable for most miners. They shut down their machines, reducing the overall computing power of the network. This makes the network more vulnerable to attacks, reduces user trust, and puts even more pressure on the price of the asset.

🔵 Stablecoin Death Spiral:

Occurs when a stablecoin loses its peg to its underlying asset (e.g., the US dollar). Investors lose confidence and withdraw their funds en masse, further exacerbating the loss of peg. This is particularly dangerous for algorithmic stablecoins.

🔵 General Market Crash:

In the event of a panic, investors liquidate their assets en masse, causing a sharp drop in prices. This can lead to the liquidation of large positions in futures markets, further increasing pressure on the market.

Causes of a death spiral:

🔵 Loss of confidence in the asset or project.

🔵 High leverage among traders, triggering liquidations.

🔵 Low liquidity, amplifying volatility.

🔵 Economic or regulatory factors, such as bans or sanctions.

How to avoid a death spiral:

🔵 Risk diversification: Do not concentrate all investments on a single asset or project.

🔵 Debt management: Avoid excessive leverage.

🔵 Support for the ecosystem