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Cryptocurrency is known for its volatility and some experts say crashes tend to happen on weekends.
“It’s been a phenomenon in crypto for several years,” said Stephen McKeon, associate professor of finance at the University of Oregon in Eugene, Ore., And partner of Collab + Currency, an investment fund focused on cryptocurrency.
These weekend declines can have significant effects as regulators assess the future of digital currency, experts say. Here’s why these crashes can occur.
Less exchanges on weekends
One of the reasons for cryptocurrency volatility on weekends is that there are fewer transactions, said Amin Shams, an assistant professor of finance at Ohio State University in Columbus, Ohio.
“When the volume is low, the same transaction size can cause prices to vary a lot more,” he said.
With banks closing this weekend, there are fewer transactions because investors may not be able to add money to their accounts, McKeon said.
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“You have times of panic in the market where there is a lot of selling pressure,” he said.
Typically, there is a rebound on Sunday night as Asian banks open and Monday as U.S. banks follow, McKeon said.
Additionally, there are cryptocurrency influencers like Elon Musk, CEO of Tesla, who “are waving a heavy hand on the crypto space,” said Tyrone Ross, CEO of Onramp Invest in New York City.
When Musk tweets something negative about bitcoin after hours, it can trigger a wave of activity.
Trading on margin
Another reason for price fluctuations on weekends may be that investors are trading cryptocurrencies on margin, which borrow money from exchanges to buy more assets, Shams said.
When digital currency prices drop below a certain level, traders have to repay the loan, known as a “margin call”.
But if investors don’t cover the loan, exchanges can sell the digital currency to make sure it gets the borrowed money back.
With banks closed this weekend, some traders may find it difficult to repay borrowed funds as they cannot transfer money to their accounts, triggering massive sales on the exchanges, Shams said.
“This will further lower the price,” he added.
It is also possible that those who attempt to artificially influence the prices of cryptocurrencies are a factor.
“There are a lot of studies that show that there are [market] manipulation, ”Shams said.
For example, research from 2019 shows how tether, a digital currency tied to the U.S. dollar, may have artificially inflated the prices of bitcoin and other cryptocurrencies during the 2007 boom.
But researchers still don’t know to what extent this is happening, he said.
One theory points to so-called “spoofing,” involving bogus buy or sell orders to influence cryptocurrency prices by creating a false sense of supply and demand.
Some believe this happens more often during the week, leading to higher prices for digital currencies. But that theory may just be speculation, he said.
Other experts say there are “mixed opinions” on these practices.
“I personally haven’t seen any conclusive evidence to suggest manipulation,” McKeon said.
Whatever the reason for the weekend’s volatility, it presents challenges for regulators weighing the approval of cryptocurrency-based exchange-traded funds.
While ETFs trade during the work week, investors can buy or sell cryptocurrencies 24 hours a day, seven days a week, and can create a lag for crypto ETFs, Shams said.
For example, if the digital currency market drops 20% on a Sunday, those who wish to sell may be stuck with their crypto ETFs until the markets reopen on Monday.
Securities and Exchange Commission Chairman Gary Gensler called for greater investor protection for cryptocurrency, signaling that additional regulation may be needed before the agency approves crypto ETFs.
The SEC is currently reviewing bitcoin and ethereum ETF applications from several companies.