Cryptocurrencies are digital or virtual currencies that use cryptography for security. They operate on decentralised networks based on blockchain technology to ensure transparent and secure transactions without a central authority.
Investing in cryptocurrency involves buying and holding digital assets for a sustained period, hoping for substantial gains over time. Trading cryptocurrencies using derivatives focuses on buying and selling over a shorter timeframe with the aim of capitalising on price movements over this briefer period.
On Capital.com, you can go long or short on assets like cryptocurrency pairs using contracts for difference, otherwise known as CFDs. A CFD is a type of financial derivative that allows you to speculate on various financial markets. Rather than buying the assets outright, you speculate on the rise or fall in their price, usually over a short period of time.
Going long could mean buying a CFD on a crypto market such as ETH/USD, aiming to profit from a rise in the underlying asset’s price. Conversely, going short involves selling a CFD to try and profit from a decline in the asset’s price.
Cryptocurrency prices can fall due to a variety of factors. Regulatory changes or bans on cryptocurrency trading by governments or regulatory bodies can create market uncertainty and trigger sell-offs. Security breaches, such as hacks on crypto exchanges or wallets, can undermine investor confidence and potentially lead to price dips. Market manipulation can artificially inflate cryptocurrency prices before a rapid sell-off, causing significant drops.
Negative news, such as fraud cases or environmental concerns can also trigger fear and heighten selling pressure among traders and investors. Broader economic downturns or financial crises can reduce investor appetite for risky assets like cryptocurrencies.
Additionally, technological issues within a cryptocurrency's underlying technology and shifts in market sentiment can also lead to substantial price dips for cryptos.
While many cryptocurrencies have experienced significant declines over the past decade – in many cases leading to ‘dead’ cryptos – Terra (LUNA) stands out as one of the most dramatic cases in recent years.
TerraUSD (UST) was an algorithmic stablecoin designed to maintain a 1-to-1 peg with the US dollar, primarily using the LUNA coin within the Terra ecosystem. When UST lost its peg to the US dollar in May 2022, this resulted in a massive sell-off and a rapid decline in LUNA's value.
This event sent shockwaves through the broader cryptocurrency market, leading to increased scrutiny and regulatory attention – and serving as a reminder of the risks inherent in the cryptocurrency space.
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