Enormous capitulation: Cryptocurrencies have been wiped out by a sharp decrease in traditional markets and all major assets. Which elements could cause this perfect storm? Stock markets had their worst day since the 2020 COVID-19 pandemic on Aug. 2, when $2.9 trillion disappeared. Recession concerns and other factors have sunk crypto markets, instilling panic. by 34% and sold over $1.13 billion in futures positions. Last-day market action has significantly shifted the Fear & Greed Index from greed (74) to fear (26), approaching acute fear.
VIX, which monitors stock market volatility using S&P 500 index options, reached 65, the highest level since the 1987 crash. Markets may see significant turmoil. Although not crypto-specific, the causes behind this decline impact Bitcoin and the altcoin market. On Aug. 5, 2024, 21Shares finance researcher Maximiliaan Michielsen warned of the risks of the crypto market’s 24/7 trading availability during an emergency analyst call. He said “Crypto was the only asset that was traded all over the weekend,” making it the only tradable asset during the bad times.
What is driving the recent sell-off?
Several variables caused the cryptocurrency market sell-off. First, the Bank of Japan’s 0.25% interest rate hike has disrupted the market. This caused the yen to rise sharply, disrupting carry trades and pushing investors to unwind leveraged positions, culminating in almost $1 billion in liquidations in one day. (FX Empire). The US jobs report and other negative economic indicators have raised recession fears. This has decreased investor interest in riskier assets like cryptocurrencies (FX Empire). Due to economic uncertainty, investors are fleeing risky assets like Bitcoin.
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Crypto markets are undergoing a “perfect storm” of conditions that will cause enormous capitulation. Major assets have fallen due to rapid falls traditional markets and cryptocurrency. Enormous capitulation: Experts predict a continued market downturn, with Bitcoin (Cointelegraph) price expectations in the low $40,000 level. Macroeconomic headwinds, regulatory uncertainty, and investor attitude shifts are driving the cryptocurrency market sell-off.
Why have markets shifted so much?
Due to global economic considerations and investor attitude swings, markets have changed substantially. Market disruption, particularly in the yen carry trade, followed the Bank of Japan’s unexpected interest rate change from 0% to 0.25%. The yen appreciation caused investors to unwind leveraged positions, generating a rippling effect across global financial markets (FX Empire). Poor economic data, especially a dismal jobs report, has raised recession fears in the US. Concerns have led investors to seek safer assets, causing a sell-off in riskier investments like cryptocurrencies and stocks (FX Empire). Investors are risk-averse due to economic uncertainties and a possible slowdown.
Crypto markets: Additionally, the Bitcoin market is undergoing a “perfect storm” of negative forces. Regulation, especially in the U.S., has increased market volatility. The SEC’s opposition to Coinbase’s discovery demands illustrates persistent regulatory problems for crypto firms (Cointelegraph). Market volatility and sell-offs are caused by macroeconomic pressures, regulatory concerns, and investor emotion.
Markets anticipate a US recession.
The US nonfarm payrolls report on Aug. 2 revealed a significant slowdown in hiring in July, with only 114,000 payrolls added instead of the predicted 175,000. According to Fed data, the Sahm Rule, devised by former Fed economist Claudia Sahm, rose to 0.53% from 0.43% in June. The Sahm Rule detects recessions early, not late. The three-month moving unemployment rate average rising by 0.5 percentage points from its 12-month low signals a recession. Every US recession since 1970 has been predicted by the indicator. Thus, the markets may have seen this recent data entry as a recession warning and behaved accordingly.
Claudia Sahm informed Yahoo Finance that the tool was designed to alert others to take action. Despite the recession warning, she feels “there is a runway, and we are not in that danger zone yet.” Enormous capitulation: The unexpected market turbulence has caused many market participants and experts to call for a Federal Reserve emergency rate drop. The Federal Reserve is projected to drop rates by 75 basis points in its September policy meeting, according to University of Pennsylvania economist and finance professor Jeremy Siegel.
Japan’s yen carries trade sell pressure
The BOJ’s decision to raise interest rates for the second time since 2007 contributed to this market change. Though tiny, at 0.25% from 0% to 0.1%, the BOJ’s hike has sparked global market reactions. Stagflation—inflation and unemployment rising simultaneously—has plagued Japan since the 1990s. Crypto markets: The BOJ set interest rates around 0% to promote the economy, enabling carry trade arbitrage. Under these market conditions, borrowing yen, converting it to dollars, and investing in stocks, real estate, or cryptocurrencies to earn larger returns was common. This carry trade required a yield above the borrowing interest rate. Many traders use this method since it can make nearly free money if done right. Japan’s recent interest rate hike establishes a precedent for future adjustments, possibly following other global central banks’ record-high hikes. Some traders may have sold their positions to secure gains, but others may have sold in a panic to cover their operations. Traders with large losses and margin calls are selling US stocks and converting them to Japanese yen to repay their loans. An abrupt forex trading move may increase short-term selling pressure on US stocks or cryptocurrencies.
Poor US tech reports raise AI bubble fears.
New US economic data and changing worldwide FX conditions have led to poor tech stock performance. Technology shares, a dominant force in the US market, comprise 42% of the S&P 500 index, a benchmark for the top 500 US corporations. Amazon dropped 9% on Aug. 1 after reporting weaker-than-expected quarterly revenue. Enormous capitulation: Intel stock fell after announcing a $10 billion cost reduction plan, resulting in 15% job layoffs. Tech stocks have been negatively impacted despite excellent sales reports from firms like Meta, Apple, and Nvidia, indicating investor concerns beyond profits. This has heightened concerns about an AI stock bubble, leading to greater market nervousness and sell pressure.
Tensions in geopolitics drive investors to cash.
Markets have been affected by geopolitical concerns since Russia invaded Ukraine in 2022. However, markets have progressed despite the turmoil. However, recent tensions between Israel and Iran have raised concerns about a potential Middle East war. Iran recently attacked Israel on April 15 in reaction to Israel’s raid on an Iranian embassy in Damascus. The incident caused a drop in Bitcoin prices as the globe feared a potential conflict between the countries. Given that the US is a committed ally of Israel and Russia and China has strategic connections with Iran, a war between these archenemies may expand into a worldwide conflict.
The level of involvement from other nations depends on their desire to directly participate in the fight. However, a regional conflict in the Middle East might have significant consequences, particularly for oil-producing nations, potentially affecting worldwide markets. In an analyst meeting, 21Shares research associate Leena ElDeeb observed that Bitcoin is not always a safe haven. 21Shares sees BTC as an emergent store like gold, but ElDeeb said that during crises like the present sell-off, “people don’t resort to gold; people resort to cash,” which may apply to Bitcoin.
Bitcoin price correct expected to intensify
These pressures push all markets, including crypto marketplaces that turn money into cash. According to prominent analyst Rekt Capital, Bitcoin’s price decline may endure two months until a bullish chart pattern breaks out. The expert advised Cointelegraph to anticipate prices at $40.000, stating that Bitcoin fell below its 50-week moving average at its lowest point. It drops much lower without substantial buyer support, triggering a more intense sell-off like in late 2021 and early 2022. If neither holds, prepare for $42,000 failure.”
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