May 28, 2023

Crypto infection: what it is, how it affects the market and investments

Article reading time:
4 min.

Crypto infection: what it is, how it affects the market and investments

Probably, many have noticed that the fall of bitcoin often causes the fall of the entire crypto market. This phenomenon is also known as crypto-infection.

What is crypto infection

Crypto infection is a situation where a negativea phenomenon associated with one cryptocurrency entails problems for other similar assets. Anything can be the reason: a hacker attack, the actions of the authorities, vulnerabilities in the program code, and so on. In any case, the meaning is the same - the problem of one cryptocurrency causes panic among people, and they begin to sell not only it, but also other coins.

Suppose ether is recognized as a security, aswants the chairman of the US Securities and Exchange Commission (SEC) Gary Gensler (Gary Gensler). Hypothetically, this can cause crypto infection. How? The main SEC argument against Ethereum is its transition to Proof-of-Stake (PoS). If we assume that this is the main motive for making the decision, then the question arises: why would other staking coins be able to avoid the same recognition? A security and a cryptocurrency are not the same thing. The former is subject to much stricter regulation. Cryptocurrency was generally conceived as an unregulated and decentralized monetary system. Therefore, the decision to declare ether a security will cause dissatisfaction with a very wide public and, as a result, a price collapse. Along the chain, a decrease may also occur in the cost of other coins on PoS: Solana, Cardano, Avalanche and others.

The scale of the crypto-infection

What is the scale of crypto-infection? Big when the whole economy can be affected. Small, when the problems affect certain groups of people.

Suppose some stablecoin has lost its peg todollar (or any other asset). This may cause an increase in investor distrust. As a result, the entire industry will suffer. Distrust of one stablecoin will lead to the fact that a mass disposal of investors from other coins may begin. Multiple requests to exchange stablecoins for other assets will begin. Companies issuing stablecoins will run out of funds, and they will start to fall one by one. Which, in turn, can lead to losses from banks and companies that accepted payments in stablecoins. This is an example of problems at the macro level.

If there is a problem with some smallcoins that few people have heard of and are used by only a few people for very specific purposes, then only they will be infected. As a result, the price of the coin will decrease, and the holders will suffer losses. That on the scale of the entire market is just a drop in the ocean. This is an example of crypto-infection at the micro level.

The impact of crypto-infection resembles a domino effect. However, this is not the same. What is the difference?

The difference between crypto infection and the domino effect

Cryptocurrency, as already mentioned above, -a situation where a negative event affecting one cryptocurrency causes a chain of changes in several others. The domino effect is the same, only the reason that causes the movement can be both positive and negative. By and large, crypto-infection is a special case of the domino effect.

Let's say in some country bitcoin was recognizedmoney (for example, in the status of a legal tender). This will positively affect the price of the first cryptocurrency. Trust in BTC will give people confidence, on a chain, throughout the crypto market. Investors will start acquiring other crypto assets, which will lead to the growth of the industry.

With crypto-infection, this is impossible, sincecause and effect must be exclusively negative. In our example, positive news led to a positive outcome — an increase in cryptocurrency prices.

As a rule, crypto infection is something unexpected. In connection with it, many investors, holders and businessmen suffer losses. Is there any way to protect yourself from it?

Protection against crypto-infection

Not 100%, of course, but limiting the risks is definitely realistic.

Probably the most banal way of protection forinvestors is to diversify assets. These can be various strategies: from Tim Draper's offer to invest in at least two cryptocurrencies, to investments in other sectors of the economy, stocks, bonds, real estate, and more.

Crypto exchanges and mining companies are required to introducestrict risk management systems. Systems must be designed to accommodate contingencies and deviations. Risk management should become a daily routine, and not pop up only in problem situations. He is just designed to make sure that situations do not arise.

For traders, a good option is to studynews background on the market as a whole and for individual cryptocurrencies. And they also do well to conduct their risk management. For example, use stop orders to limit losses.

Banking structures can implement strictKYC policy (“know your customer”) and fight against money laundering (Anti-Money laundering, AML). Also, they should take care of a sufficient number of reserves. True, such players are distinguished by a centralized management model, which goes against the conceptual basis of cryptocurrencies, so there are other negative effects from such procedures.

In other words, crypto-infection is a phenomenon in which onea negative event for the crypto industry leads to a whole series of others related to the fall of the market. In order to fight infection, the principles of diversification and risk management cannot be neglected.