What happens if a cryptocurrency goes negative?
Technically speaking, just like other assets, cryptocurrency cannot go negative. The lowest an asset reach in value is $0. Since cryptocurrency works on the same lines as any other tangible asset, thus the lowest it can reach is zero in valuation.
But there are scenarios where we can attribute cryptocurrency to a negative value. So, it becomes a relevant question as to what happens if a cryptocurrency goes negative?
So, traders can end up in red if they do not fully understand the risk associated with trade. Keep reading to understand the phenomenon comprehensively.
A thorough investigation:
If we have a keener look at the factors that hurt a cryptocurrency’s value, we can deduce the below points.
The short answer: As stated earlier, no asset, including cryptocurrency, can have worth less than zero. The rule applies to all purchases, including currencies, property, security, etc.
However, this does not guarantee that a cryptocurrency investor will not make losses.
The long answer: A crypto investor can have a negative account balance, which depends on the nature of the investment. It usually happens when an investor opens a short position or trades through a margin account. The strategy is known as leverage or debt.
Since margin funds are a type of loan-bearing interest rate, investors can purchase more significant securities than they can with cash. Thus, investors can make good gains if the security appreciates beyond the charged interest rate. They return the borrowed amount along with interest and take the rest back home.
Here is the rub: if the price drops below the purchase price, the investor is on the hook for paying back the principal amount and the interest owed on the amount they borrowed. Thus, taking their account balances into negative. So, this is how and what happens if crypto goes into negative?
How did crypto crash?
When we discuss cryptocurrencies, only one name hits our minds: Bitcoin. However, there are more than eight thousand cryptocurrencies available for trading. To no surprise, even regular traders can only name not more than a dozen cryptocurrencies.
First, we need to understand that market is different for every crypto. Like any market phenomenon, cryptocurrency also works on the demand and supply rule. When investors start buying a particular cryptocurrency, its value tends to rise. The same goes the other way, and if investors stop investing in a currency, its value tends to drop.
A swift drop in investment leads to a stoppage of mining, causing a crypto crash for that particular cryptocurrency.
Steps to avoid negative cryptocurrency
The simple answer is to make a wise and well-researched investment decision. It would be best if you opted for professional advice before putting your eggs in any basket.
The two most common mistakes both sets of new and professional investors make are high buying and under selling.
- Most new investors follow the trend. They invest in a cryptocurrency where other investors already do most of them. Just because crypto is on the high side does not make it a good investment. Remember, the price will eventually fall, thus inflicting losses.
- Try not to panic, stay calm, and read the market before moving. It is the opposite of high buying. In this case, investors sell their currency too early when the demand rises. So, do not fumble your position by panic-selling.
- The wash sale rule usually does not apply to crypto trades, which means you can quickly realize your losses to offset gains.
- Set up a sound, workable strategy bearing entry and exit points, and stick to it.
- Plan risk mitigator strategy, some investors apply a stop loss plan to manage high-risk and volatile investments.
- You can use future trading to adopt a leverage option to hedge the market.
Conclusion:
While cryptocurrency can never be negatively balanced, however traders are likely to lose money. The risk is high in such an unstable market, especially if they adopt strategies including future contracts or margin trading.
Always seek professional advice, and have risk mitigation strategies like hedging or stopping losses in place. The methods of making money with crypto are still an evolving process. So, staying alert to unwanted positions is highly advised, as it is an unregulated asset class.
We have covered and answered what happens if a cryptocurrency goes negative? Here’s hoping you got your answer in detail. Keep visiting us to learn more about cryptocurrency trade and related topics. Adios for now!
Frequently Asked Questions
No, the lowest a cryptocurrency can reach is to drop to zero. Since Blockchain restricts overdraft facilities; hence it cannot go into negative.
No, the maximum you can lose is your actual investment. As soon as the value of a currency hits the zero mark, it cannot slide further. So, the most significant loss you can suffer is your invested amount.
No, you are not entitled to a refund of your investment. When a crypto crash to zero, all investment is in the loss. However, you cannot owe a single penny to the crashed crypto.
Cryptocurrency trading works on the rule of demand and supply. The higher the demand, the higher the value, and vice versa. Popular tokens like bitcoins rarely drop because they are the most trusted and have high market value. Similarly, if investors lose interest in cryptocurrency, the market forces their devaluation.
Several factors cause negative cryptocurrency investment. The most common ones are enlisted below:
1. Hacking of a blockchain
2. Losing your security keys
3. Not having a sound strategy
4. Underselling or overbuying