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This could be what caused the latest cryptocurrency flash crash

This could be what caused the latest cryptocurrency flash crash
Image source: Getty Images.

Cryptocurrency markets took a nosedive over the weekend. It’s par for the course for long-time crypto investors, but those newer to the space might have been left scratching their heads and asking what on Earth happened.

There are never any certainties when it comes to digital assets. But here, I’ll run through the theories as to why the crypto weekend party got crashed and what could be in store moving forward.

What happened to the cryptocurrency markets over the weekend?

It was not a pretty time to be a crypto investor, that’s for sure. The price of Bitcoin (BTC) took a steep dive, pulling down other digital assets with it.

According to CoinMarketCap the price of Bitcoin dropped off a cliff from $57,000 (£43,000) on Friday to lows of around $45,000 (£34,000) by Saturday. This marked a sharp 20% decline in the leading cryptocurrency.

Other coins and tokens saw even bigger drops in value. One interesting element in all this was that Ethereum (ETH) didn’t go down by quite so much. This may be a sign that the number two crypto is starting to decouple from the movements and whims of Bitcoin.

Why did this cryptocurrency crash happen?

Only recently, the digital asset market took a tumble, with lots of factors contributing to the decline. This weekend’s flash crash appears to be no different, with no single major catalyst. However, here are the main theories as to why the market is suffering right now:

  1. Fears around the Omicron variant have shaken global equity markets, and this fear spilt into crypto.
  2. Digital assets tend to move in line with the stock market, but they are the first things to be sold during periods of uncertainty.
  3. There’s a lot of leverage trading, which means using borrowed money. The volatility means even a small dip can trigger a big sell-off where traders are forced out of their positions.
  4. Further applications in America for a Bitcoin ‘spot-ETF’ linking to the cryptocurrency itself have been rejected.
  5. There’s ongoing uncertainty around the regulation of digital assets in the US and around the globe.

What’s next for the cryptocurrency market?

What happens with global stocks is likely to continue to have an effect on the digital asset market. Regardless of tech advances, if stock markets fall or stall, so too will crypto.

The difference, however, is that stock market drops are usually much smaller than the epic cryptocurrency tumbles. So buying shares is going to be a safer way to invest if you’re not a fan of volatility. Because whether the crypto market goes up or down, no one will argue against it being extremely volatile.

By investing in companies you also have the ability to protect your gains from tax using a stocks and shares ISA account. Doing this is much more straightforward than navigating the current crypto taxation rules in the UK – rules that most people don’t fully understand!

Investing in Cryptocurrency is extremely high risk and complex. The Motley Fool has provided this article for the sole purpose of education and not to help you decide whether or not to invest in Cryptocurrency. Should you decide to invest in Cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.

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