Dump or dumping describes when a lot of selling of a cryptocurrency takes place all at once.
This can happen across a single cryptocurrency, an entire sector like DeFi, Gaming, or Metaverse, with an entire ecosystem like Ethereum, or with all cryptocurrencies simultaneously.
The dump usually causes sharp spikes down in price, often causing more investors and traders to sell off, reinforcing the selling pressure.
Dumps are caused by various factors.
Crypto market cycles or the normal ups and downs of the market across a lengthy period of time like months and years are said to contribute to dumps.
A common market cycle that many market participants and investors believe that Bitcoin adheres to goes as follows:
- accumulation
- greed (or Bullish Cycle)
- distribution
- fear (Bearish Cycle)
- Repeat
The problem with the cycle is determining where in the cycle the market is currently operating. If we knew that, we would buy during the accumulation phase, hang on tight during the rid as prices increase, sell during the distribution phase, and then exit or short as the market moves down.
But it’s very difficult to know exactly where we are because market mechanics and human emotions blur what exactly is going on.
Some traders may think we are in distribution, while others think we are in the fear cycle, so trader behavior reacts differently to different phases, and not everyone agrees and acts the same.
Crypto market regulation, or even the hint of regulation, can panic the market.
Traders hear that a government is getting ready to ban cryptocurrencies outright and they believe this will have a negative effect on sentiment, so they sell all of their holdings.
Others traders see this and also sell, and the situation repeats itself over and over, causing a dump.
Poor performance in the equities markets, especially those of the United States and other large economies has at times, had a direct correlation to the market performance of the cryptocurrency markets.
For example, when the S&P500 opens down, a positive correlation states that the crypto markets will follow suit.
This idea has taken hold and market analysts now track the correlation between Bitcoin, the largest cryptocurrency by market capitalization and market share, and the S&P500 over various lengths of time in the past.
This is not a perfect science, but some experts still believe cryptocurrencies might serve as hedges against the fluctuations of other financial markets.
Another contributor to market dumps are negative events affecting the crypto markets, like large-scale hacks or scams. Hacks have the power to suck all funds out of projects as investors look for a safe haven for their digital assets.
Blackswan events, events that nobody saw coming, can easily affect market participants, leading the dumps.
Terra blockchain’s epic collapse of its algorithmic stablecoin, UST, and sister coin, LUNA, happened in the span of a weekend, and immediately wiped out $40 billion from the cryptocurrency market.
What followed included a cascading effect of margin calls, insolvencies, and bankruptcies experienced by several other crypto-related businesses, which shocked the entire cryptocurrency ecosystem, with some people calling it Crypto’s Lehman Brothers.
Finally, large market participants, like whiles, hedge funds, large enterprises, and institutions have the power to move the market, injecting and pulling out vast sums of money.