As we know, the crypto world is highly volatile, and can bring big profits, as well as major losses to the investors. Many small or big events can occur, impacting the whole crypto market. Today we are looking at one of those events, known as crypto contagion.
What is crypto contagion?
Crypto contagion is an event in the crypto market where one negative event can trigger a chain reaction, causing a downturn in a bigger market.
The contagion effect occurs when there is a decline in the value of one cryptocurrency, spreading over to other cryptocurrencies. This leads to a loss of confidence in the whole market. Investors start to panic and sell off their holdings, which, as you might guess, leads to a negative trend.
Crypto contagion can be caused by many different factors, such as regulatory crackdowns, hackers attacks, market manipulations, etc.
The effect of crypto contagion on the market
The crypto contagion can have micro-level effects, focused on individual investors and businesses, as well as macro-level effects with far-reaching implications, impacting many different industries and the global financial system.
On a micro level, the loss of faith in a given cryptocurrency can trigger a sell-off at a lower price, leading to financial losses for individual investors. Moreover, it can impact the income and profitability of different crypto-related businesses.
At the macro-level, crypto contagion can have a broader impact. The decline in investment and economic growth, brought on by a lack of investor faith in cryptocurrencies, can have an impact on different businesses and industries.
The contagion effect vs. the domino effect - is it the same?
The contagion effect and the domino effect on the crypto market have some main differences.
While the contagion effect refers to the spread of market unrest from one cryptocurrency to another, the domino effect outlines a scenario in which the failure of one asset sets off a chain reaction, causing further collapses.
If we have a closer look, we will see that crypto contagion and the domino effect differ in their cause, impact and recovery.
The crypto contagion effect occurs after a key event causes a decline in the price of a cryptocurrency.
The domino effect can be caused by different factors, such as regulations, new major partnerships, or else that have an impact on the price of one cryptocurrency, spreading to others.
The crypto contagion can lead to dropping prices and shake investors’ confidence, while the domino effect can have both positive and negative impact.
Last, the recovery from crypto contagion can be a big challenge, as it takes time for investors to restore confidence. At the same time, the recovery from a crypto domino effect, leading to a positive impact, can be much faster.
How to protect yourself from the crypto contagion effect?
As we already said, the crypto contagion effect can have a major impact on different stakeholders on the market, including individual investors, businesses, and the broader financial system. There are some specific steps every stakeholder must take to protect himself from the negative impact.
Diversifying the portfolio - this way, investors can lower their exposure to crypto contagion.
Risk management - crypto-related businesses can protect themselves by maintaining strong risk management practices.
Performing due diligence - this will help traders keep up with recent developments in the crypto market. By being informed, traders will guard against the negative impact of crypto contagion.
As we know, it is important to make informed decisions when investing in any kind of assets, digital or not. That is why we suggest you always do proper research and never invest more than you are willing to lose.
Cryptoarbi is an automated crypto arbitrage platform. All you have to do is choose the right subscription plan, and we will do the work for you.