By Nathan Ferguson
When the decline in value of one currency spreads among the other crypto assets causing a downfall in the entire market, the situation causes panic among the investors, causing a negative sentiment. This article will study the crypto contagion effect and its impact on the market. Moreover, readers will also learn the difference between the crypto contagion and ripple effects, respectively.
Understanding Crypto Contagion
Any adverse event in the crypto market causing a continuous chain reaction in the entire market is known as the crypto contagion effect. It creates negative sentiments in the market leading to a downturn.
The strict regulations by the governing bodies regarding the usage of certain products and services may lead to crypto contagion. It decreases the value leading to the downfall of a coin. In addition, it also causes an impact on other currencies as traders worry about similar rules for other assets too.
Whales in the market may also cause an abrupt change in the price of any currency leading to market manipulation. In addition, hacking incidents and scams may also lead to crypto contagion. Any theft from wallets creates negative sentiments in the crypto market.
Impact of Crypto Contagion on the Market
Crypto contagion causes different effects on the financial market at micro and macro levels. At the micro level, it may cause traders to lose faith in the market and encourage them to sell the currency. It also causes an impact on the capital earned by the traders discouraging the businesses to avoid from using crypto as means of payment.
At the macro level, it affects industries and businesses. The downfall of any major crypto asset has a dominant effect on the global economic system.
Is Contagion Effect Created Through Stablecoin Depegging
A crypto contagion effect may initiate in the market due to the depegging of any stablecoin. In case traders lose hope or lack trust in the market. When a stablecoin tries to gain a stable value, it may lose its peg to the underlying asset. It makes the traders lose confidence in the market.
Traders start worrying about the integration of other stablecoins into their underlying assets. It may also decrease the support for stablecoins harming the adoption of crypto assets.
Crypto Contagion Effect vs Crypto Ripple Effect
In the crypto contagion effect, the market unrest spreads in the entire market, whereas, in a crypto ripple effect, changes in any crypto asset cause an impact on the other. It can be negative or positive. Both the crypto contagion effect and crypto ripple effect depend on market changes and the behaviour of traders in the market.
The crypto contagion effect is caused when any dominating effect causes a sharp change in a crypto asset’s prices, creating a market panic. On the other hand, in the crypto ripple effect, any factor may influence a crypto asset, thus spreading it down to the other cryptocurrencies.
In the crypto contagion effect, prices drop, creating a lack of confidence and bearish sentiments in the financial market. It might also lead to a market crash in some cases. However, the crypto ripple effect can also be positive sometimes.
Recovering from the crypto contagion effect might take time as prices must be stabilized again. On the contrary, the crypto ripple effect might boost the market if it causes a positive impact.
Protection From Crypto Contagion
Investors can decrease their exposure to crypto contagion by diversification of their trading profiles. They should be educated enough and make rational decisions in the market to prevent loss. Moreover, robust risk management can help industries and businesses prevent significant losses through the crypto contagion effect.
Conclusion
Traders can create barriers against significant losses during crypto contagion by continuously monitoring market developments and making informed decisions. In addition, they should also apply other market tactics to minimize the loss in such a situation.