Here’s why cryptocurrency crashes on weekends.
Cryptocurrency is known for its volatility, and some experts believe that crashes tend to occur on weekends.
“This has been a cryptocurrency phenomenon for several years,” said Stephen McKeon, associate professor of finance at the University of Oregon in Eugene and partner at Collab+Currency, a cryptocurrency-focused investment fund.
These weekend dips could have a significant impact as regulators consider the future of digital currency, experts say. Here's why these accidents might occur.
There are fewer trading on weekends, which contributes to weekend cryptocurrency volatility, said Amin Shams, assistant professor of finance at Ohio State University in Columbus, Ohio.
“When volume is low, the same trade size can move prices much more,” he explained.
Because banks are closed over the weekend, there is less trading because investors may be unable to deposit funds into their accounts, according to McKeon.
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“There are times when the market panics and there is a lot of selling pressure,” he explained.
According to McKeon, there is typically a rebound on Sunday night as Asian banks open and into Monday as U.S. banks follow.
In addition, cryptocurrency influencers such as Tesla CEO Elon Musk “wave a heavy hand over the crypto space,” according to Tyrone Ross, CEO of Onramp Invest in New York.
When Musk tweets something negative about bitcoin after-hours, it may set off a chain reaction of events.
Trading on Margin :
Investors buying cryptocurrencies on margin, or borrowing money from exchanges to buy more assets, could also be a factor in weekend price volatility, according to Shams.
Traders must repay the loan if digital currency prices fall below a specific threshold, which is known as a "margin call."
However, if investors fail to repay the loan, exchanges may sell the digital currency to ensure that the borrowed funds are returned.
With banks closed for the weekend, some traders may find it difficult to repay borrowed cash because they are unable to deposit funds into their accounts, resulting in currency sell-offs, according to Shams.
“That will down the price even more,” he continued.
Market Manipulation :
It's also possible that those attempting to manipulate cryptocurrency prices are a factor.
“There are numerous studies that show [market] manipulation,” Shams said.
For example, new research from 2019 suggests that tether, a digital currency tied to the US dollar, may have artificially inflated bitcoin and other cryptocurrency prices during the 2017 boom.
However, researchers are still unsure of the extent to which this occurs, he said.
One theory points to spoofing, which involves faking buy or sell orders in order to manipulate cryptocurrency prices by creating a false sense of supply and demand.
Some speculate that this occurs more frequently on weekdays, leading digital currency prices to climb. But, he cautioned, this theory could just be conjecture.
According to some specialists, there are "mixed views" on the procedures.
McKeon stated, "I have not personally seen any compelling evidence that shows tampering."
Crypto ETFs :
Whatever the cause of weekend volatility, it presents difficulties for regulators considering the approval of cryptocurrency-based exchange-traded funds.
While ETFs trade during the business week, investors can buy and sell cryptocurrency 24 hours a day, seven days a week, which may create a mismatch for crypto ETFs, according to Shams.
For example, if the digital currency market falls by 20% on a Sunday, those looking to sell may be forced to hold their crypto ETFs until the markets reopen on Monday.
Gary Gensler, the chairman of the Securities and Exchange Commission, has called for greater investor protections for cryptocurrency, implying that more regulation may be required before the agency approves crypto ETFs.
Several companies have submitted bitcoin and ethereum ETF applications to the Securities and Exchange Commission (SEC).