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Cryptocurrency is known for its volatility and some experts say that crashes happen on weekends.
“This has been a cryptocurrency phenomenon for several years,” said Stephen McKeon, associate professor of finance at the University of Oregon at Eugene and a partner at Collab + Currency, a cryptocurrency-focused mutual fund.
Those weekend slumps can have a significant impact as regulators weigh the future of the digital currency, experts say. Here’s why these crashes can happen.
Less trading on the weekend
One of the reasons cryptocurrency is volatile over the weekend is because there are fewer trades, said Amin Shams, assistant professor of finance at Ohio State University in Columbus, Ohio.
“When the volume is small, the same trade size can move prices a lot more,” he said.
With banks closed on weekends, there is less trading as investors may not be able to fund their accounts, McKeon said.
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“There are moments of market panic when there is a lot of pressure to sell,” he said.
Typically there is a rebound on Sunday evenings when Asian banks open and on Monday when US banks follow suit, McKeon said.
There are also cryptocurrency influencers like Tesla CEO Elon Musk who “wave a heavy hand across the crypto space,” said Tyrone Ross, CEO of Onramp Invest in New York.
When Musk tweeted something negative about Bitcoin outside of business hours, it could spark a wave of activity.
Trading on margin
Another reason for price fluctuations over the weekend could be investors trading cryptocurrencies on margin, which is where money is borrowed from the exchanges to buy more assets, Shams said.
When digital currency prices drop below a certain level, traders have to pay back the loan in what is known as a “margin call”.
However, if investors don’t cover the loan, exchanges can sell the digital currency to ensure they get the money borrowed back.
With banks closed over the weekend, some traders may struggle to repay the borrowed funds because they cannot transfer funds to their accounts, leading to sell-offs on the exchanges, Shams said.
“That will bring the price down further,” he added.
It is also possible that those trying to artificially influence cryptocurrency prices may be a factor.
“There are a lot of studies that show that it is [market] Manipulation, “said Shams.
For example, research from 2019 shows how Tether, a dollar-pegged digital currency, could have artificially propelled the prices of Bitcoin and other cryptocurrencies up during the 2007 boom.
But the researchers still don’t know to what extent this is happening, he said.
I personally haven’t seen any conclusive evidence suggesting tampering.
Associate Professor of Finance at the University of Oregon
One theory points to what is known as spoofing, which is the use of fake buy or sell orders to influence the prices of cryptocurrencies by creating a false sense of supply and demand.
Some believe this happens more frequently during the week, causing digital currency prices to rise. But that theory can only be speculation, he said.
Other experts say there are “mixed views” about these practices.
“I personally haven’t seen any conclusive evidence suggesting tampering,” McKeon said.
Regardless of the reason for the weekend volatility, this poses challenges for regulators weighing the approval of cryptocurrency-based exchange-traded funds.
While ETFs trade during the working week, investors can buy or sell cryptocurrencies 24 hours a day, seven days a week, which can create a mismatch for crypto ETFs, Shams said.
For example, if the digital currency market falls 20% on a Sunday, those who are eager to sell can stick with their crypto ETFs until the markets reopen on Monday.
Securities and Exchange Commission chairman Gary Gensler has called for greater investor protection for cryptocurrencies, suggesting that more regulation may be needed before the agency approves crypto ETFs.
The SEC is currently reviewing Bitcoin and Ethereum ETF applications from several companies.