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4 Key Reasons Cryptocurrencies Tend to Crash Over the Weekend

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Jul. 13 2021, Published 4:09 p.m. ET

Since they are not tied to any regulatory authority and can be traded any time of day, cryptocurrencies never sleep. While it seems like a free-for-all, the biggest drawback is the market swings that tend to occur over the weekend. Here are four key explanations experts have offered for the weekend crypto dip phenomenon.

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University of Sussex finance professor Carol Alexander conducts research on cryptocurrency and has recently observed this trend, which she has dubbed “the Sunday effect.” While cryptocurrency never takes a day off, the digital asset managers who trade them do.

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Digital Currencies and Background

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Less trading volume on the weekend equals lower prices.

Alexander's observation of the "Sunday effect" is because those U.S. asset managers who are instrumental in influencing the price of cryptocurrencies usually take Sundays off. While they may occasionally trade on Saturday, without their participation in the market, prices tend to drop.

As more institutional investors have entered the market, the crypto market has changed dynamically. However, one thing remains consistent among cryptocurrencies and that is their volatility and the nature of investors to leverage their digital assets. The combination of these forces often lends itself to the issue of leverage and not enough collateral.

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Price Check
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Automatic liquidation is another possible cause of weekend dips.

It is very common to for cryptocurrency investors to take excessive risk and borrow funds from exchanges to buy more assets. In doing this, they hope to increase their returns. Most crypto exchanges do not have margin calls, per se; instead they have auto-liquidations. Without notice, positions are automatically liquidated by the exchange if the collateral in the margin account falls below the maintenance margin.

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If the loan is not covered, exchanges will sell off a borrower's digital assets to ensure they are covered for the money that was borrowed. With the risk of liquidation, investors are limited in how they transfer funds, which leads to triggering sell-off from exchanges.

Market manipulation has also been cited as a possible cause for the Sunday effect.

"Spoofing" is the practice of putting large orders on the market without the intention of executing them. Some trading companies engage in this type of market manipulation in order to inflate the prices of certain assets. This act creates a false sense of supply and demand. However, some researchers are not certain to what extent it happens and some argue spoofing occurs more on weekdays.

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While there is not much conclusive evidence that suggest this level of manipulation, research has shown that some digital currencies have artificially inflated prices of cryptocurrencies—especially in the wake of their boom in 2007.

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The rise of crypto ETFs, which aren't traded on weekends, could also.be a factor.

There is an inherent mismatch between crypto ETFs and the cryptocurrency market. Regardless of volatility, ETFs are only traded during the work week, but the cryptocurrency market does not have such limitations

Keeping this in mind, if the crypto market is down by 30 percent on a Sunday, those who intended to sell are now left holding and waiting for markets to open up on Monday. With more regulation from the Security and Exchange Commission (SEC), investors may find themselves more protected, but we are still a long way from that.

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