Understanding Crypto Market Volatility: Weekend Crashes & Investor Concerns

The cryptocurrency market gets lazy during the weekends and eventually crashes.

Price volatility is a huge concern in the cryptocurrency market. There’s some degree of volatility involved with the stock market too, but the cryptocurrency market, being fairly new, comes with lesser understanding. In May this year, HSBC, Europe’s biggest investment bank, denied any interest in cryptocurrency as an investment on account of it being “too volatile”.

Out of all the understanding that experts have, a recent trend was noticed by analysts – cryptocurrency crashes usually occur on weekends. Stephen McKeon, a finance professor and partner at Collab+Currency, a crypto focussed investment fund explained in an interview that liquidy requires study of the supply of buyers and sellers. If there are few buyers compared to sellers or vice versa, transactions fluctuate resulting in a spike or crash.

Another reason stated by Amin Shams, professor at Ohio State University talks about the cryptocurrency market’s connection with thin trading volumes, which cause dramatic swings. Besides this, there are influential people like Elon Musk who can change the course of the cryptocurrency market with one tweet.

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Understanding the market structure

The cryptocurrency market is made of several exchanges that have their own policies as there is no centralization. The cryptocurrency market is also active 24 hours. So when people trade, when people are awake, when people are observing the markets and making big moves also impact the way the market behaves and prices fluctuate.

While there are several more theories to this weekend’s market laziness, one of the explanations given by Teddy Fusaro from Bitwise Asset Management shines. He believes that traders should expect less liquidity from the market during the weekends and predicts that this trend will continue in the future as well. His theory is simple, market makers are less loaded on weekends, so it reacts by rising or crashing.

Margin trading also plays a vital role. Generally, traders borrow money from the exchanges and purchase crypto coins. When the value of the coin dips to a certain level, they must repay the debt. But when traders are unable to repay, the exchanges sell the holdings to make money. Such cases increase during the weekends as banks are closed. This triggers the price.

Remember the Reddit incident that caused a big stir in the market. Such market manipulation is often a visible reason. A 2019 research talked about a scenario where Tether, a stable coin, artificially inflated Bitcoin and altcoins during the 2017 cryptocurrency boom. While many analysts are on the fence about this theory, it cannot be fully ruled out.

Be it due to a decline in trading activities or lack of operational banks, this phenomenon of the cryptocurrency market dipping only during weekends is becoming more of a fact with conclusive proofs, week after week. What do you think?