Why Crypto Markets Crash Over Weekends

Have you ever heard of the Sunday effect? If not, it is a concept that refers to the plummeting of crypto prices during weekends. For example, a report by CNBC shows that BTC fluctuates wildly during weekends. Some investors trade after their workweek because they can’t wait to take advantage of these price swings.

These weekend dips could have significant effects as market regulators weigh on the prospects of virtual currencies. Experts say these price crashes are related to less volume, margin trading, and other factors. Today, we look at the primary factors that cause crypto market crashes during the weekends and their causes.

Understanding the Market Structure

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Before you know why prices plummet, you need to understand how the market operates, particularly during weekends.

Crypto trading continues 24/7 in various exchanges on a global scale. Some investors think of this as an advantage because they can profit from the market at any time. However, it poses the challenge of constantly monitoring prices to make trades and book profits on time.

The composition and characteristics of the market affect prices. Thus, every action traders take affects the market. For instance, when people trade, when banks are closed or when people observe the markets and make huge moves dramatically, it influences how prices of assets fluctuate.

Less Trading Volumes

Trading volumes play a significant role in the crypto Sunday effect. First, very few people hold crypto – approximately 2% of accounts control 95% of BTC supply. Therefore, when whales transact during low trading volume periods, it creates exaggerated price fluctuations.

Secondly, the crypto market structure comprises many different exchanges, with each having unique liquidity times. Some people hype BTC as 24/7, 365 liquidity, yet this, in reality, means that there are instances of thin liquidity. If you’d like to transact $200 million in Bitcoin, it would be best if you did so during primary banking hours.

Professional traders tend to stick with the Monday to Friday trading schedules. Thus, it is clear why liquidity or ease of trading an asset wanes during weekends. If there are fewer sellers than buyers or vice versa, trading becomes harder. This situation leads to either a crash or a rise in crypto prices.

Related: Here’s Why Analysts Still Believe BTC Could Hit $100k

Crypto Market Laziness

The crypto markets are still developing; no one is certain about theories explaining their weekend price action. Teddy Fusaro states that liquidity providers and market makers are less-staffed during weekends and a possible volatility cause.

Fusaro, Bitwise Asset Management’s CEO, also notes that it is a market feature that has always been there. Analysts suggest that this feature is unlikely to change soon; hence, traders should expect less market liquidity during weekends while the market reacts by either crashing or rising.

Margin Trading

Another major factor causing crypto prices is margin trading when traders borrow funds from exchanges or brokers to trade crypto assets. By and large, many investors borrow money to transact in the crypto market.

When the price of a coin plummets to a particular level, they have to repay the debt. If traders cannot pay the debt, exchanges or brokers sell off the holdings to make money. These cases increase especially during weekends because most commercial banks are closed, consequently dropping crypto prices further.

Market Manipulation

Traders attempting to influence crypto prices artificially may be another factor. For example, crypto exchanges may deliberately employ data to attract potential investors to their preferred trading platforms.

Traders may also manipulate the market by initiating a false buy or sell order. The fraudulent sell-and-buy orders create an illusion of optimism or pessimism, commonly known as spoofing.

Influential individuals also take advantage of their mass following through their actions and posts to manipulate crypto prices. For instance, a few months ago, Elon Musk bought $1.5 billion worth of BTC through his company. He, however, seemed to retreat from Bitcoin, ranking it as harmful to the environment.

Musk had also earlier dismissed Dogecoin then later promoted it. All this was in a bid to control the multi-trillion-dollar crypto market.

One of the many disadvantages of market manipulation is price volatility and lack of intrinsic value. Prices of assets may drop drastically, for instance, when influential individuals make negative comments about a crypto asset to manipulate the market.

Crypto ETFs

Independent of the reason for high weekend volatility, it poses encounters for regulators weighing the authorization of crypto-based exchange-traded funds.

Crypto markets are active 24/7, allowing you to trade at any time. However, you can only trade ETFs during working days, leading to a mismatch between crypto ETFs. For example, if the crypto market plummets by 20% on a Sunday, those anticipating to sell may be trapped with their crypto ETFs until Monday when the markets reopen.

How to Protect Yourself from Crypto Crashes

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A study revealed that 97% of daily crypto traders lose money. While this is true, do not let this scare you away. It’s plausible to profit from crypto markets. However, it would be best if you were ready with some wise investment strategies. Here are some:

• Balance your portfolio – do not put all your money in one basket. Invest in diverse coins to minimize loss while maximizing profits.
• Stop losses – they prevent losses by closing trades on time if prices swing unexpectedly.
• Don’t follow the hype – investing in crypto-based on hype is highly risky. Study the markets thoroughly and use the knowledge to make informed decisions and calculated risks.
• Start small, grow gradually – do not get swept up by promises of huge upswings. Start with allocating a single-digit percentage of your portfolio. The loss is much more bearable.

Be it due to the reduction in trading volumes or lack of commercial banks, the crypto markets crash is a reality that we have to grasp. Crypto is still in its infancy. Hence it may take some time before regulators and experts find a solution for its volatility. For now, be ready. If you’d love to profit from cryptocurrencies, do your research, consult widely and invest conservatively at first.