“Death Spiral” – scary?

🌀 What Is the “Death Spiral” in Crypto – and Why It’s Worse Than It Sounds

Crypto has no shortage of scary terms: “scam”, “dump”, “delisting”… But one of the most ominous is the “death spiral”. It sounds like a thriller title – and for good reason. It’s a process where the price of a crypto asset starts dropping – and each drop triggers further selling pressure, causing the price to fall even more. Left unchecked, the asset can crash to zero or close to it. Here’s what it means, how it works, and why it’s dangerous.

Simply put

A death spiral happens when an asset’s price drops so much that it causes more selling, which leads to even lower prices… and the cycle repeats. Each turn makes things worse.

How it works – a stablecoin example

Let’s take UST (yes, that UST that collapsed in 2022). It was supposed to stay pegged 1:1 to the dollar, backed by another token — LUNA.

Here’s how the spiral started:

1. UST lost its peg, dropping to $0.98.
2. The algorithm began burning UST and minting LUNA to restore the peg.
3. This flooded the market with LUNA, causing its price to drop fast.
4. Investors panicked and began selling both UST and LUNA.
5. More sales – lower prices – more minting – deeper collapse – and around it went.

In the end:

• UST fell from $1 to $0.01.
• LUNA crashed from $100+ to a fraction of a cent.
• Billions of dollars – vanished.

Where else can it happen?

• In PoW networks (Proof-of-Work), if the token price drops so low that mining becomes unprofitable. Miners shut down – hash rate drops – network becomes vulnerable – confidence disappears – price drops even more.
• In algorithmic tokens, where value depends on automatic rebalancing mechanisms.
• In lending platforms, where tokens serve as collateral. If price drops – collateral gets liquidated – which causes more selling – deeper crash.

Why it’s dangerous

• Death spirals are self-reinforcing.
• They don’t need an outside attacker — collapse happens from within.
• Panic and automation (bots, smart contracts) speed up the destruction.
• Very hard to stop without massive external capital – which most projects lack.

How to spot a death spiral forming?

• A stablecoin loses its peg (e.g., trading at $0.98 or less).
• Sudden increase in supply of the secondary token.
• Panic, liquidations, delistings, silence from the dev team.
• Exchanges suspend trading or delist tokens.
• The team abandons support for the project.

✅ What can you do?

• Avoid algorithmic stablecoins without transparent reserves.
• Don’t go all-in on tokens whose price depends on “smart contract magic”.
• Monitor price, liquidity, and exchange actions closely.
• Remember: holding a token in free fall is not strategy – it’s denial.

Conclusion:
A death spiral is like crypto dominoes. One mistake – and the whole thing crashes, taking investors, teams, and billions down with it. No magic, just flawed mechanics. The best move? Get out before the spiral sucks you in.