What Characteristics Make a Cryptocurrency More Vulnerable to a Death Spiral?
Cryptocurrencies with a slow or infrequent difficulty adjustment mechanism are highly vulnerable, as they cannot quickly adapt to sudden hash rate drops. Furthermore, low market capitalization and high price volatility increase vulnerability.
A low market cap means a small price drop can have a disproportionate effect on miner profitability, leading to mass shutdowns and initiating the spiral.
Glossar
Death Spiral
Cascade ⎊ The "Death Spiral" in cryptocurrency derivatives, options trading, and related financial instruments describes a self-reinforcing negative feedback loop where declining asset prices trigger margin calls, forced liquidations, and further price depreciation, ultimately accelerating the downward trajectory.
Low Market Capitalization
Market Cap Constraint ⎊ Low Market Capitalization signifies that an asset has a relatively small total outstanding value, which inherently translates to thinner trading volumes and lower available liquidity across spot and derivative venues.
High Price Volatility
Momentum ⎊ The confluence of elevated trading activity and rapid price fluctuations characteristic of high price volatility within cryptocurrency markets, options trading, and financial derivatives signifies a heightened sensitivity to both positive and negative catalysts.