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Anyone who invests in cryptocurrencies knows the risks involved in this investment. But, at the same time, we hope that these risks do not materialize.
As a new category in the financial investment market, cryptocurrencies will hardly have their prices stabilized anytime soon. Therefore, being aware of this situation and also of the rich when investing in crypto, the investor must choose wisely where to allocate their resources for the long term.
Even if you are an experienced investor and have done a lot of research before choosing the cryptocurrencies where to allocate your money, you can still make mistakes and therefore, you need to be calm about this.
Due to recent news about the LUNA cryptocurrency that had its operations closed and also about other cryptoassets in crisis, from time to time we should ask ourselves, how should we act when a cryptocurrency crashes? That’s what we’re going to talk about today!
First of all, what can we consider as a good cryptocurrency?
The predicates or characteristics of a cryptocurrency, according to what we have been able to learn from the market so far, are…
Liquidity – Being listed on large exchanges with large volumes is essential for any cryptocurrency to have liquidity and be able to attract large investors and traders.
Network Security – Network security is critical for any cryptocurrency. This is important to prevent majority attacks and to provide robustness to the blockchain.
Credibility – Credibility is a consequence of security and liquidity, added to the development team.
Adoption – Is this cryptocurrency being used? Does it solve a problem efficiently and practically?
If you look at it, the main cryptocurrencies in the current market have these requirements, with others being more or others less.
Still, there are other relevant characteristics when we talk about cryptocurrencies and we need to clarify about this.
“But isn’t decentralization important?”
That will depend on his idea of cryptocurrencies. We can see projects that are extremely centralized managing to do well in the market and having a good credibility.
“Is price not important too?”
It obviously depends on whether a cryptocurrency reaches 0 and stays there, it will be a consequence of all the other factors mentioned above.
There are cryptocurrencies that have their price close to zero and still remain firm and strong, one of them is Dogecoin.
We need to understand the price change over a given period of time and what events determined this change. That is, we need to understand their behavior. Taking the price alone doesn’t say much.
Now let’s talk about how a cryptocurrency crashes!
A cryptocurrency dies when its credibility is threatened by the most varied reasons: fraud, majority attack, theft of a significant number of coins or abandonment of the project by the developers.
When the currency’s credibility starts to erode, its adoption slows down or declines over time, resulting in a large price drop. Consequently, investors dump that currency into the market.
After the eviction, this currency falls into oblivion, with very low volumes, until it begins to be excluded from the exchanges on which it is traded. No exchange will want to hold a crypto with no trading volume.
Without brokers, there is no way to buy or sell these coins in large quantities. Unless you find a P2P that is willing to trade contained, at the cost of a gigantic spread.
This isn’t necessarily a death spiral
Not all cryptocurrencies necessarily go through the cycle described above. Some of them die before they can even be listed on exchanges, not all of them suffer attacks, and not all of them are scams.
An example of a “zombie” cryptocurrency (which has died, but does not know it yet) is the Brazilian MarteXCoin. It has never had a large volume and has never been listed on a major exchange.
Exit Scam
This is also one of the most common ways of death of a cryptocurrency is what we know as Exit Scam. This is very common in ICOs that have issued tokens on some platform, whether Ethereum, Waves or EOS.
Basically, in the Exit Scam, the cryptocurrency project owners simply take everyone’s money and disappear right after. There are so many tokens that have already died that you can track them in Dead Coins.
What can we expect?
Cryptocurrency crashes for several reasons: illiquidity, low interest, devastating hacks, delisting on exchanges, abandonment of development and exit scam.
Some cryptocurrencies follow this cycle until they fall into complete oblivion. But not all follow this behavior. The bottom line is that if a cryptocurrency dies, it means it shouldn’t even have existed in the first place.
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