This results in a massive increase in supply, while demand falls, with rapidly decreasing token prices being the result.Īnd in the crypto world, where there is no lender of last resort to provide emergency liquidity and funding, a death spiral may very well be irreversible, or at the very least, difficult to stop. Once it starts, everyone begins to sell, and no one wants to buy. Since everyone is cognizant that everyone else knows that the token is overvalued and that a devaluation is likely to occur, all holders are likely on high alert for when the first signs of devaluation occur. I have previously discussed how supply and demand of tokens influences price.īut what happens during a death spiral is a unique combination of fear and inflated token prices that drives people to make selfish decisions. In order to eliminate death spirals, it is first necessary to understand what causes the death spiral in the first place. Understanding the process of a death spiral So is there a better way to manage token values, such that death spirals become rarer, if not eliminated altogether? Stories of people losing their life savings overnight are all too common, and there have even been cases of people committing suicide in the aftermath of a crypto crash.Ĭlearly, this is not an ideal scenario- but all too common as people invest what they cannot afford to lose only to watch it vanish into nothing in a bear market. A death spiral is something many of us never hope to be trapped in- it means the loss of massive amounts of capital, and the rapid devaluation of tokens that are held by many people.
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