The crypto market’s ‘perfect storm’ could lead to more massive capital.
In the year On August 2, $2.9 trillion was lost from the stock markets, resulting in the worst trading day of 2020 since the COVID-19 crisis. Worsening fears of a recession and other factors also plunged the crypto markets, flooding the sentiment with fear.
Bitcoin (BTC) fell by 27%, Ether (ETH) by 34%, and more than $1.13 billion in futures positions were canceled. Last day's market action changed the fear and greed index from greed (74) to fear (26), which is close to high fear.
The CBOE Volatility Index (VIX), which measures stock market volatility based on S&P 500 index options, hit 65, the highest level since the pandemic. This indicates that markets are likely to enter a highly volatile phase. The reasons for this decline are not crypto-specific, but clearly affect Bitcoin and the altcoin market in particular.
In the year On August 5, 2024, during a surprise analyst call, Maximiliaan Michielsen, a financial researcher at 21Shares, highlighted the downside of the crypto market's unique 24/7 trading offering. He stated that “crypto is the only asset he trades over the weekend,” making it his only asset in the event of negative events.
What is driving the recent sell-off, and how have the markets changed dramatically? Recent market data shows widespread skepticism about the ability of global policymakers, particularly the US Federal Reserve, to curb inflation without causing significant collateral damage. Additionally, many factors need to be considered into the equation.
The markets believe that a recession could hurt the US economy
In the year On Aug. 2, the U.S. nonfarm payrolls report showed a sharp slowdown in hiring in July, with employers adding 114,000 payrolls instead of the 175,000 expected. In this new data entry, the Sahm Rule, developed by former Fed economist Claudia Sahm, reached 0.53%, up from 0.43% in June, according to Fed data.
Sahm's Law is designed for when recessions start, not when they happen. A recession signal is triggered if the three-month moving average of the unemployment rate rises by 0.5 percentage points or more from its 12-month low.
The indicator has successfully identified the onset of every recession in the US since 1970. Therefore, the markets could have interpreted this latest data entry as a sign of an impending recession and acted accordingly.
Claudia Sahm explained to Yahoo Finance that the tool was created to help others notice when to act. “There is a runway, and we're still not in that danger zone,” she believes, despite the negative signs of a recession.
The sudden market turmoil has led many market participants and economists to support an emergency rate cut by the Federal Reserve. Jeremy Siegel, an economist and finance professor at the University of Pennsylvania, called for a 75-basis-point rate cut, with a further 75-basis-point cut expected at the Federal Reserve's September policy meeting.
The Japanese yen trade is sold
A significant factor behind this sudden market change is the Bank of Japan's (BOJ) decision to raise interest rates for the second time since 2007. Although modest, from the previous 0.25% to 0.1%, the BOJ's growth is enough to cause a significant reaction in the global market.
Since the 1990s, Japan has experienced persistent stagflation, characterized by simultaneous increases in unemployment and inflation. To stimulate the economy, the BOJ kept interest rates close to 0%, creating an environment for arbitrage, known as commodity trading.
In these market conditions, the broad strategy involves borrowing money in yen, converting it to dollars, and investing in stocks, real estate, or cryptocurrencies for higher returns. The key to this freight business was getting a higher yield than the interest rate on the loan. This strategy, when implemented wisely, can turn into free money, making it popular with many traders.
Japan's recent interest rate hikes set a new precedent for future adjustments. While some traders were able to sell their positions in time to make a profit, many market participants were forced to sell out of fear to cover their positions.
Traders who are suffering huge losses are selling US stocks to get dollars and converting them into Japanese yen to pay off their loans. This sudden change in forex trading results in short-term selling pressure on US stocks or cryptocurrencies.
Disappointing US technology reports rekindled the threat of a potential AI bubble
Recent data on the US economy, coupled with volatile global forex conditions, have been linked to disappointing results for tech stocks. Technology stocks, which have been a dominant force in the U.S. market, represent 42 percent of the S&P 500 index, a measure that tracks the performance of 500 U.S. companies.
In the year On August 1, Amazon fell 9% after the e-commerce giant reported weaker-than-expected quarterly earnings. Intel stock tumbled as it announced a $10 billion cost-cutting plan that would lay off 15 percent of its workforce.
Despite positive earnings reports from companies such as Meta, Apple or Nvidia, technology stocks were negatively impacted, suggesting that investor concerns extend beyond earnings results. This reignited fears of a potential AI stock bubble, further fueling market anxiety and contributing to increased selling pressure.
Investors use geopolitical tensions to cash in
In the year Geopolitical tensions are weighing on markets after Russia invades Ukraine in 2022. However, despite the turbulence, the markets are moving forward. However, recent tensions between Israel and Iran have led the market to see more war in the Middle East.
The last time Iran attacked Israel was on April 15, in response to Israel's attack on the Iranian embassy in Damascus, Syria, following the attack, Bitcoin's price was shaken by uncertainty over a possible war between the two. Countries. With the US being a strong ally of Israel, and Russia and China having strategic ties with Iran, there is a fear that the war between these enemies could turn into a wider international conflict.
The extent of participation of other countries will depend on their willingness to participate directly in the conflict. However, regional conflict in the Middle East, particularly in oil-producing countries, could have far-reaching collateral effects that could affect global markets.
Lina Eldib, research associate at 21Shares, noted at the analyst meeting that while the narrative of Bitcoin is as a safe haven, it will not fulfill that role permanently. 21 shares BTC as gold as emerging store views; However, LDB noted that “people don't use gold” to sell in times of crisis like now. People go back to money.” This is comparable to the value of Bitcoin.
The price of Bitcoin is expected to rise
All these conditions put pressure on all markets, including the crypto markets where money is converted into cash. Prominent analyst Rect Capital believes that Bitcoin's price decline could last for two months before a new bullish chart pattern breaks out.
As for the price range, the analyst told Cointelegraph to prepare for price levels around $40,000:
“At the low point, Bitcoin fell below its 50-week moving average. Without strong buyer support now, it will go much lower, and likely trigger more active selling as it did in late 2021 and early 2022. If it doesn't contain both, it's worth preparing for a $42,000 fallout. “
A perfect storm seems to be blowing in the crypto market, participants need to take a broader view and tune in to macroeconomic events that could push the market back into positive territory.
