1. What is crypto gluing?
A crypto rally is an event where a negative event in the cryptocurrency market triggers a chain reaction, leading to a broader market decline.
The contagion effect occurs when a decline in the value of one cryptocurrency spreads to other cryptocurrencies or digital assets, creating uncertainty in the overall market. Investors may panic and sell off their holdings, increasing the negative trend. A variety of factors, including regulatory relaxation, hacker attacks, and market volatility, could cause cryptocurrencies to grow exponentially.
Increased compliance is a negative event that can cause cryptos to accumulate. It can cause a price decline if a government imposes strict regulations on the use or trading of a particular cryptocurrency. As a result, that coin could see a sell-off, which could affect other cryptocurrencies as investors begin to worry that similar regulations could be imposed on them as well.
Market volatility can also contribute to the growth of cryptos. The joint buying or selling of a particular cryptocurrency by multiple traders or fish can result in sudden price fluctuations causing all traders to react. A broader market decline or rise can result from this, creating a chain reaction of panic buying or selling.
Another factor that could boost cryptos is cyber events. The loss of confidence in the security of the marketplace can be caused by the theft of an important exchange or wallet. Investors may start selling other cryptocurrencies, including hacked ones, as they fear potential exposure to other currencies.
2. How does the rise of crypto affect the market?
While the micro-level effects apply to individual investors and crypto-related businesses, the macro-level effects can have far-reaching effects, potentially affecting many industries and global financial stability heart.
The micro and macro effects of a crypto virus can be quite different. A loss of confidence in a particular cryptocurrency, at a micro level, can trigger a sell-off and lower its price. Individual investors holding that cryptocurrency could lose money as a result. It could also impact revenue and profitability for businesses involved in the cryptocurrency industry, such as exchanges and mining operations. It could also affect the ability of companies that use cryptocurrencies as a means of payment or exchange to operate and conduct business efficiently.
The rise of cryptos could have broader macroeconomic implications. A slowdown in investment and economic growth caused by investor distrust in cryptocurrencies could affect some businesses and industries.
The collapse in the value of the multi-billion dollar cryptocurrency industry could have a huge impact on the global economy. However, as cryptocurrencies become increasingly interconnected in the global economy, a general decline in confidence could negatively impact the stability of the entire financial system.
Related: Circle USDC volatility causes a domino effect on stablecoins DAI, USDD
3. Can depegging stablecoins create a contagion effect in the crypto market?
Depegging can cause a sickening effect in the crypto market, especially if investors see it as a sign of broader volatility or uncertainty in the market.
The loss of confidence in the overall stablecoin market could be due to the loss of correlation of the stablecoin – which is meant to hold a “stable” value – to the underlying asset it is meant to follow.
Investors may begin to worry about the stability of other stablecoins designed to maintain a similar correlation if they begin to question the stability of the stablecoin. If the negative sentiment spreads to other digital assets, it could lead to a broader price decline and a sell-off of stablecoins.
Related: USDC falls as Circle confirms $3.3 billion is stuck at Silicon Valley Bank
In addition, the decline in support for stablecoins could have a significant impact on the adoption of the cryptocurrency ecosystem. Because of the volatility in the market, stablecoins are often used as an exchange rate between different cryptocurrencies or as a store of value. A drop in the confidence of stablecoins could lead to trading halts and more volatility in the market.
