On August 5, 2024, the cryptocurrency market experienced "Black Monday." Bitcoin plummeted by 15% within 24 hours, dropping below $53,000; Ethereum experienced a 30% drop within 24 hours, falling to around $2,100, wiping out its gains since 2024. The decline in other altcoins was even more severe.
Large-scale Sell-off Within a Week
In the past week, the cryptocurrency market experienced the largest sell-off in nearly a year. Bitcoin dropped from $70,000 to $52,000, and Ethereum dropped from $3,300 to $2,100, causing the entire cryptocurrency market to shrink by nearly $500 billion in market value.
Why Didn't Multiple Positive Factors Prevent the Plunge?
Despite the market digesting bearish news such as the German government selling 50,000 bitcoins and the compensation from Mentougou, it also received significant bullish news such as the approval of an Ethereum ETF, support for cryptocurrencies from American politicians including Trump, and a high probability of a rate cut by the Federal Reserve in September. However, the cryptocurrency market still experienced a significant decline in early August.
BiKing analyzed various factors: the main reason may be the interest rate hike by the Bank of Japan and the appreciation of the yen. Other factors include weak U.S. employment data, slowing growth of major tech stocks, escalating concerns about economic recession, ETH sell-off by Jump Trading, geopolitical tensions between Iran and Israel, and seasonal market trends.
Bank of Japan's Interest Rate Hike Sparks Market Turmoil
On July 31, the Bank of Japan decided to raise interest rates to 0.25% and reduce the scale of bond purchases, exceeding market expectations. This led to a surge in the yen, with the USD/JPY exchange rate dropping from 160 to 145. Subsequently, the Japanese stock market plummeted, with the Nikkei index falling by about 15% over three trading days, entering a technical bear market.
Nick Ferres, Chief Investment Officer of Vantage Point Asset Management, stated that the sell-off in the Japanese stock market was "massive in scale, extremely rapid, and emotional." Mike Novogratz, CEO of Galaxy, believes that the interest rate hike in Japan triggered global risk aversion.
Due to the long-term low interest rate policy, the yen has been used by international capital as a "funding currency" for arbitrage. Once Japan's interest rate hike leads to yen appreciation, arbitrage funds will face exchange rate and interest rate losses, forcing them to sell U.S. tech stocks. According to Huachuang Securities research, the scale of arbitrage funds borrowing yen to invest in dollar assets is approximately $1 trillion.
Concerns About U.S. Economic Recession
The downturn in the Japanese stock market spread to global markets. The Nasdaq index fell by over 5% in the last two trading days of the previous week, and Nasdaq futures fell by 2.5% on Sunday night. Lower-than-expected second-quarter earnings reported by major companies such as Microsoft and Intel exacerbated concerns about economic recession.
Goldman Sachs economists raised the probability of a U.S. economic recession in the next year from 10% to 25%. Berkshire Hathaway reduced its holdings in Apple and increased its cash reserves, indicating an anticipated market pullback.
Jump Trading's ETH Sell-off
On-chain analysts observed that Jump Trading may have been selling ETH, redeeming batches of wstETH worth $410 million and transferring them to exchanges such as Binance and OKX. Market commentators believe that Jump Crypto's large-scale sell-off intensified market volatility.
Escalation of Geopolitical Tensions Between Iran and Israel
U.S. Secretary of State Antony Blinken informed G7 leaders that Iran and Hezbollah may attack Israel, leading to an escalation of tensions in the Middle East. Several countries have issued evacuation warnings to their citizens in Lebanon and Iran.
Seasonal Market Decline
Coinbase analysts pointed out that August is typically a slow season for the cryptocurrency market. Historical data shows that the average decline of Bitcoin in August is 2.8%, leading to increased volatility due to reduced liquidity and trading volume.
Outlook for the Future
In the short term, the cryptocurrency market is significantly affected by macroeconomic fluctuations. The CEO of Galaxy believes that the interest rate hike in Japan will continue to drive global risk aversion.
If the U.S. economy enters a recession, risk assets may further decline. Analysts suggest that the price of Bitcoin may fall below $50,000.
In the long term, the rate cut by the Federal Reserve and the loose monetary policy in the United States may boost the cryptocurrency market. With more dollars entering the market, the cryptocurrency market may rise accordingly.
Overall, although short-term market trends are difficult to predict, the long-term outlook for the cryptocurrency market remains bullish.
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