The contagion effect occurs when the decline in value of one cryptocurrency spreads to other cryptocurrencies or digital assets, resulting in a loss of confidence in the entire market. Investors may panic and sell off their holdings, escalating the negative trend. Various factors, including regulatory crackdowns, hacking attacks and market manipulation, can cause cryptocurrency contagion.
Regulatory crackdowns are one adverse event that can cause crypto contagion. It can result in a decline in value if a government adopts stringent rules on the usage or trade of a specific cryptocurrency. As a result, that coin may see a sell-off, which could impact other cryptocurrencies as investors begin to worry that similar laws may also be imposed on them. Market manipulation may also contribute to the crypto contagion. A coordinated purchase or sale of a particular cryptocurrency by several traders or whales may result in an abrupt price change that causes a response across the market. A broader market slump or upswing may result from this, setting off a chain reaction of panicked purchasing or selling. Another factor that can cause crypto contagion is hacking incidents. A loss of faith in the market’s security may result from the stealing of funds from a significant exchange or wallet. Investors could begin selling off other cryptocurrencies, including the one that was hacked, as they panic about the prospect of other hacks. The effects of crypto contagion on a micro and macro level can be very different. A loss of faith in a specific cryptocurrency can, on a micro level, trigger a sell-off and lower its price. Individual investors who own that cryptocurrency may suffer financial losses as a result. It may also impact the income and profitability of businesses involved in the cryptocurrency industry, such as exchanges and mining activities. Also, it could impair the ability of businesses that use cryptocurrencies as a form of payment or exchange to function and transact effectively.
Full analysis : What is crypto contagion, and how does it affect the market?
