Why cypto market crashes happen; and how to protect your money

A market crash is seldom caused by a single event. There is never just one reason for a sudden crypto crash.

Instead, a few problems usually hit all at once.

First, bad news about the global economy makes investors cautious.

Then, fears of stricter government rules on crypto create more uncertainty.

Finally, these issues trigger a panic within the market itself, pushing prices down dramatically.

1. Global economic factors

The price of crypto is heavily tied to the global economy.

When powerful institutions like the US Federal Reserve raise interest rates to combat inflation, it suddenly becomes more profitable to own super-safe investments like government bonds.

As a result, many large investors sell their crypto to move their money to these safer options.

With more sellers than buyers, the price of crypto is pushed down.

2. Government regulation

Investors hate uncertainty, and the crypto world is full of it.

The rules for crypto are still being written, meaning a single announcement, a single amendment to the law, can change the game overnight.

News that a government might introduce new taxes, or that a major crypto company is under investigation, creates immediate panic.

Rather than risk their money being tied up in a legal battle, many investors sell first and ask questions later, causing prices to fall sharply.

3. The domino effect of borrowed bets

A key reason crypto crashes are so fast and brutal is something called 'leverage' - which is basically gambling with borrowed money.

Traders borrow huge sums to place massive bets, hoping for massive profits.

But when the market turns, the exchange doesn't wait to be paid back.

It automatically force-sells the trader's crypto at a loss.

This first wave of forced selling pushes the price down further, which then automatically triggers a sell-off for other traders who also borrowed.

It creates a vicious domino effect that can cause the market to nosedive in minutes.

4. Widespread panic selling

Crypto prices are driven by two powerful emotions: greed and fear.

When prices are rising, greed takes over, and the 'fear of missing out' (FOMO) creates a buying frenzy that pushes prices beyond realistic values.

But when the market turns, fear spreads like wildfire.

Seeing prices fall and gains disappear, investors rush to sell.

This panic creates a downward spiral, as each wave of selling convinces more people to get out.

How to protect your money

While you can't control the market's chaos, you are in full control of your own strategy.

The best way to protect your investment is to have a clear, disciplined plan for managing risk.

1. Invest responsibly

The golden rule of crypto investing is: only use money you are fully prepared to lose.

This means you never touch your rent money, the funds for school fees, your family's budget, or your emergency savings.

Think of crypto as a high-risk gamble, not a savings account.

It should never put your financial security in jeopardy.

2. Spread your investments

You've heard the saying, 'don't put all your eggs in one basket.'

This is especially true in crypto. Betting everything on a single coin is extremely risky.

Instead, it is safer to spread your investment across several different types of crypto projects.

A market crash can pull down even the best coins.

To protect yourself, your overall investment portfolio should also include more traditional and stable assets such as stocks, bonds, or real estate to balance your overall portfolio risk.

3. Use a stop-loss order

A stop-loss is an automated order you place with an exchange to sell a cryptocurrency when it reaches a specific, lower price.

This tool is critical for risk management.

It establishes a clear exit point for a trade, limiting your potential loss if the market moves against you.

This removes emotion from the decision-making process during a panic-inducing market fall.

4. Avoid high leverage

Do not trade with borrowed money (leverage).

While it promises to magnify your profits, it is the fastest way to lose your entire investment.

A small market dip can be enough to have your position automatically sold off by the exchange, leaving you with nothing.

The risks of rapid liquidation and losing one's entire investment far outweigh the potential rewards in such an unpredictable market.

5. Think long-term

It is crucial to distinguish between short-term trading and long-term investing.

If you are investing based on the long-term potential of a project's technology and fundamentals, you should be prepared to withstand periods of extreme volatility.

Panic selling during a downturn is how many investors realise significant losses.

A long-term strategy, grounded in thorough research, helps to weather market cycles.

6. Keep your crypto safe

During a market crash, the exchange you use can become your biggest risk.

These exchanges can be targeted by hackers, or they can simply freeze your account, preventing you from accessing your money when you need it most.

For any serious investment, consider using a hardware wallet.

It's a small offline device that stores your crypto where no one else can touch it, giving you total control even if the exchange you bought it from collapses.

One fact about cryptocurrency is certain: it will always be volatile, and market crashes will happen again.

The key to success is not trying to guess the market's next move, but controlling what you can: your own strategy.