Why Does Cryptocurrency Go Down During Holidays?

While traditional asset trading takes a break on holidays, crypto trading occurs 24/7. Although such a market gives investors the prerogative to trade to their wishes, it’s susceptible to major price swings. Cryptos tend to dip on weekends and major holidays, but why does it crash during the holidays?

Cryptocurrency goes down during the holidays because of thin liquidity. Most big investors and financial institutions take a break during the holidays. Active traders can’t add funds but can only trade with what’s in their accounts. The lack of liquidity leads to market drawdown.

Below is an in-depth explanation of why cryptocurrencies go down during the holidays.

Do Cryptos Crash During Holidays?

Cryptos crash during the holidays because of low trading volumes. During holidays, investors take a break to enjoy the festivities. Less trading occurs, and the reduced trade volume can swing prices significantly.

Crypto isn’t the purview of small traders only. 

Institutional traders, including asset managers, also trade cryptocurrencies in large volumes. Such investors can dictate crypto prices due to the vast amounts they transact. Most institutional and individual investors take a break from crypto trading during holidays. 

Without the participation of big players, fewer trades occur, and prices generally fall.

Trading bots and algorithms can trade automatically during holidays, but they require a human eye to ensure everything runs seamlessly. Traders might shut down trading operations to enjoy their holidays without interruptions.

Banks Closure Could Be Why Cryptos Crash During Holidays

Low trading volumes could be due to the closure of banks on holidays.

The dependence of cryptos on fiat currency cannot be overstated. You purchase cryptos using fiat, and when you lock in profits, you convert your cryptos to fiat. That’s why exchanges request users to fund their accounts before purchasing or trading cryptos.

There are several options for funding crypto accounts, but none is more vital than banks. 

Unlike debit cards, banks charge a meager fee to fund crypto accounts and are the preferred avenue of financing cryptocurrency trading accounts. When banks close during the holidays, traders are forced to trade what’s in their accounts. 

If their accounts are empty, they must wait for the banks to reopen before trading.

The closure of banks decreases the trading volume and lowers crypto prices, which is validated by the behavior of cryptos in the US on Sunday nights. As banks in the Asian time zone begin to open, cryptos suddenly rebound.

Margin Trading on Holidays Causes Crypto Prices To Plunge

Another major reason cryptos plummet on holidays is increased margin trading. With banks closed on holidays, the only option for traders to buy more crypto is by borrowing from the brokerage.

Lending money from exchanges to trade cryptos is called margin trading. This strategy enables traders to leverage their positions using a loan from the exchange. Some brokers even offer leverages of 200:1, meaning you can trade 200x what’s in your account.

Naturally, crypto margin trading is risky, but this risk is amplified on holidays. 

Volatility is an issue during holidays, meaning crypto prices can dip to unprecedented levels. Prices might even hit rock-bottom if more investors liquidate their long-term positions.

When cryptos fall beyond a specific price, exchanges and brokerages issue a margin call to traders. A margin call is a request to traders to top up their account balances to the minimum maintenance margin required.

Traders must deposit additional funds to satisfy margin calls. But since banks are closed on weekends, many traders struggle to fund their accounts and offset the margin call. Exchanges end up liquidating positions if traders don’t satisfy margin calls. This trend causes crypto prices to drop further down.

Self-Fulfilling Prophecies Might Cause Cryptos To Plummet During Holidays

Market psychology has a significant effect on cryptocurrencies. If crypto traders believe something might happen in the market, that thing might just happen. These self-fulfilling prophecies could be what drives cryptos down during holidays. 

If investors believe that crypto prices will fall during Thanksgiving, the prices will likely dip.

Most prophecies draw their conclusions from historical data. For example, during 2017, 2019, and 2020 Chinese New Year celebrations, BTC prices dropped. Investors might be pessimistic about BTC prices on upcoming New Year celebrations using such data.

When traders deem that prices will fall during a holiday, they’ll make bets to profit from the dip. Of course, the logical action during a plunge might be selling your crypto assets. The more investors offload cryptos, the more the prices plunge.

Cashing Out Might Cause Crypto To Go Down During the Holidays

The reason why cryptocurrencies go down during holidays could be because traders are cashing out. Many traders rush to liquidate their crypto assets for cash when holidays approach. The selling pressure rises, and the markets react by lowering prices.

The need for cash often spikes during the festive periods. Holiday traditions dictate dishing out gifts, shopping, and engaging in merry-making activities. The huge demand for money might force traders to sell their crypto assets during holidays. 

As more investors liquidate their positions, crypto prices begin to fall.

Market Manipulation Could Be the Reason Cryptos Go Down During Holidays

Crypto trading isn’t regulated by any institution, making it susceptible to manipulation. According to Bloomberg, about 1000 users own 40% of BTC. Also known as whales, these crypto owners are capable of influencing cryptocurrency markets.

Some whales are active during holidays/weekends. During such periods, crypto whales are keen to offload or amass crypto and benefit from the price swings. Increased fake selling orders from whales can bring down crypto prices during the holidays. 

These crypto whales then look for ways to profit based on how the market reacts.

The act of creating fake orders in crypto markets is known as spoofing. The extreme volatility of crypto markets on holidays creates the ideal environment for spoofing.

Whales start by placing large sell orders which they don’t intend to fulfill. The sell orders create an illusion among retail traders that prices are falling. Most traders react by liquidating their positions, leading to more price dips. Whales take advantage of the price dips to amass a lot of cryptos, which they’ll flip once prices shoot up.

An example of such a phenomenon occurred during the 2017 December holidays. During this period, Bitcoin prices had rallied close to $18,000.

However, the prices plummeted over the Christmas and New Year period. 

Come February 2018, the prices had dropped by almost 50% and were trading close to $7000. The price drop could have been a reaction to South Korea’s regulation of cryptos, but the sudden spike of BTC to $49,000 in March raised suspicion.

Spoofing has been touted as to why cryptos fell during the mentioned time. No documented evidence exists to prove this spoofing allegation.

Declining Crypto Prices During Holidays Might Be Due to Cryptocurrency ETFs

Unlike their underlying assets, crypto ETFs don’t trade 24/7. These ETFs mimic the trading hours of the stock market, meaning they don’t trade on holidays. If the crypto prices plunge at the start of the holidays, investors in crypto ETFs have to stick with their losses until the market reopens.

Crypto ETFs can suffer significant losses when they hold losing positions during weekends and holidays.

Bottomline

Cryptocurrencies go down during the holidays because of low trading volumes. Fewer active crypto traders make the market vulnerable to volatility. 

Other reasons that might cause cryptos to crash during holidays include:

  • Market manipulation from crypto whales.
  • Increased margin trading.
  • Closure of financial institutions like banks.
  • Market psychology.

Sources

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