What Causes Crypto Market to Rise and Fall?

In the latest article, Mikey Kremer, technical team leader at Messari Crypto, shared insightful and candid analyses of the core dynamics driving the crypto market, shedding light on the factors that determine the growth and decline trends.

What makes the market rise?

Airdrop opens the positive trend of the market

According to Mikey, markets rise in price as new money flows in, creating a “wealth effect.” What all markets want is for crypto to not only create real value in the real world, but also share this financial expansion with the community.

Some ways to achieve this are through the release of airdrop, a powerful tool to drive market engagement and growth.

In December 2023, airdrop Jito distributed 90 million JTO tokens, with a value of up to $165 million at launch. Some users who simply swapped $40 JitoSol received a value of up to $10,000.

This event not only boosted Solana's TVL (Total value locked), but also increased on-chain activity, stimulating the broader development of the Solana ecosystem. Its impact is likened to the Uniswap UNI event in 2020, which fueled the DeFi boom.

Jupiter also adopted a token distribution strategy with a plan to airdrop 700 million JUP tokens to more than 2.3 million eligible wallets. This is considered one of the largest airdrop events in crypto history, aiming to grow the ecosystem by encouraging long-term and active participation in governance.

Both of these events demonstrate their effectiveness in expanding market participation and creating real value.

Strategic distributions such as airdrop have proven to be powerful drivers for the market growth cycle.

For example, the Uniswap airdrop in 2020 sparked the “DeFi Summer”, which stimulated a wave of innovation in decentralized finance. Similarly, the Jito airdrop in December 2023 became a turning point for the Solana ecosystem, boosting TVL and driving unprecedented on-chain activity.

These airdrop events act as ecosystem-wide economic stimulus packages, creating self-reinforcing loops of investment and innovation, contributing to shaping the market eras they represent.

Traditional investors jump into the game

When markets have positive catalysts such as airdrops, they attract investors who stand aside to bring new capital inflows and excitement. Cash flow from large investors creates a positive loop, promoting market expansion and innovation.

Previously observant investors, having witnessed the success of airdrops and subsequent market dynamics, began to transfer capital into the ecosystem, turning from observers into active participants.

This shift from cash to crypto assets represents a real influx of new cash entering the ecosystem, rather than just a shift of capital between existing participants

Large financial institutions are increasingly acting as intermediaries in the process, with firms such as BlackRock, Fidelity and Franklin Templeton developing products that connect traditional finance with digital assets.

Their participation helps to legitimize the market and opens up easier access points for new capital flows. This creates a “total positive” environment where new entrants contribute to the overall growth of the market.

Unlike the zero-sum trading environment, the market is driven by new capital inflows that create a real wealth effect through liquidity expansion, increased growth activity, and widespread acceptance. This positive feedback loop continues to attract marginal capital inflows, driving ecosystem growth.

In the final phase of a bullish cycle, leverage becomes the main factor driving prices, marking the transition from value creation to value multiplier. As the market enters the price discovery phase, traders increasingly use leverage to amplify their positions, creating a self-reinforcing loop of bullish momentum.

As Bitcoin breaks through historic highs, leverage increases sharply as traders seek to maximize their profitability. This creates a chain effect, in which stablecoin Borrowing is used to buy more assets, push prices higher and encourage more leveraged positions. This leverage effect accelerates price movements causing the market to enter a long and strong bullish phase.

However, the increasing use of leverage also increases the fragility of the system. As more traders use leverage, the risk of mass liquidation increases, especially as the cost of borrowing stablecoins becomes more expensive and difficult to access.

Rising stablecoin borrowing costs are an important indicator that the market is entering its final phase. This is an important transition from organic growth to leveraged based expansion, where no new value is created, only existing value is increased. high through debt.

The heavy reliance on leverage during this period creates a precarious situation where unexpected price movements can trigger mass liquidation, leading to sharp price corrections. This weakness suggests that the bullish cycle is nearing its end, as the system increasingly relies on borrowed money rather than real value creation.

What ants the falling market?

Markets depreciate as cash flows leave the ecosystem, creating a “reverse wealth effect.” This is when opportunists take advantage of the herd mentality of the market for profit, smart investors withdraw capital to make a profit, and the less experienced are liquidated.

Here are the main causes of the falling market

Large amounts of money withdrawn from the market

The crypto ecosystem regularly goes through cycles of value drawdowns, as sophisticated operators design plans to draw capital from enthusiastic market participants.

Unlike innovations that actually deliver value, these plans often draw liquidity through mechanisms of a “predatory” nature.

A good example is the Aiccelerate DAO project, which despite receiving support from Bankless founders and well-known industry advisors, still faces criticism when insiders sell tokens instantly without any lock-in period.

Celebrity token projects also exemplify this behavior, shifting assets from retail investors to internal hands through malicious smart contracts and organized token discharges.

Instead of reinvesting profits into ecosystem development, these plans drain liquidity from the market. The amount of withdrawn capital often leaves the crypto ecosystem altogether, reducing the available capital for real projects and innovations.

The trend from apparent scams to sophisticated schemes backed by big names is a worrying sign. As reputable organizations engage in rapid value withdrawal strategies, it becomes increasingly difficult to distinguish between legitimate projects and fraudulent schemes.

There are only sellers

As the market begins to plunge, a serious imbalance emerges between professional investors, who recognize early signals and reduce risk, with retail investors, who still cling to bullish stories.

• Professional investors:Traders and large investment funds begin to reduce the risk ratio in the portfolio by selling assets through OTC (off-exchange) trades or strategic exits. This helps them preserve capital without causing a strong impact on the market, creating an illusion of stability even if a large amount of capital has left the system.
• Retail investors:The sentiment of rejection of reality leads retail investors to continue to believe that the decline is just an opportunity to buy more. They are influenced by online communities that perpetuate optimistic stories, an attachment to unrealized gains from previous upswings, and a misunderstanding of the “diamond hand” spirit.

When markets continue to fall, retail investors often miss the best exit point and end up selling out in a panic when prices have fallen deeply.

The steady drawdown of professional investors creates more vulnerable market conditions, where each subsequent sell order has an increasing impact on the price.

Collapse of leverage (Cascading Liquidations)

The final stage of a market crash is often marked by the devastating effects of excessive leverage, which is perfectly consistent with Warren Buffett's famous saying: “Only when the tide recedes, you know who is swimming without clothes.”

• The collapse of 3AC: In June 2022, the $10 billion hedge fund of Three Arrows Capital (3AC) collapsed. Their leveraged positions, including $200 million in LUNA and a large investment in Grayscale Bitcoin Trust, triggered a chain of forced liquidations, exposing a complex network of borrowers, affecting more than 20 financial institutions.
• The Fall of FTX:Alameda Research borrowed $10 billion from FTX client funds, creating an unsustainable leverage structure. When it was discovered that 40 percent of Alameda's $14.6 billion worth of assets were in FTT, an illiquid token, their system collapsed, bringing FTX as well.

These collapses caused a domino effect in the industry, sending many platforms such as BlockFi, Voyager and Celsius bankrupt. Mass liquidated leveraged positions sharply reduce asset prices, causing subsequent liquidations in a negative loop, exposing the market's reliance on leverage rather than actual liquidity.

When the market crashes, it reveals weaknesses in risk management and the fragility of the crypto ecosystem, where a failure can trigger a system-wide crisis.