The cryptocurrency market is currently experiencing its worst daily performance since the collapse of the FTX crypto exchange in November 2022, reflecting a global market rout. On August 5, the market capitalization of all crypto assets combined plummeted by up to 15.80% to reach a six-month low of $1.694 trillion. The leading cryptocurrencies, Bitcoin (BTC) and Ether (ETH), which collectively control over 70% of the overall crypto market share, were hit the hardest by the losses.
The primary reason behind these declines is the diminishing appeal of yen-dollar carry trades. In a typical carry trade scenario, traders borrow funds in a low-interest currency, such as the yen, exchange them for a high-interest currency like the US dollar, and then use the proceeds to invest in various assets like stocks and bonds. This strategy has been profitable for investors due to Japan’s near-zero interest rate policy compared to the higher rates in the US.
However, the Bank of Japan (BOJ) recently increased its interest rate to 0.25% on July 31, sparking speculation of further hikes among traders. In contrast, the US Federal Reserve is expected to begin cutting interest rates in September due to rising unemployment and slower economic growth. Consequently, the yen has surged against the dollar to its highest levels since January 2024, disrupting the profitability of the yen-dollar carry trade.
As a result, traders who borrowed yen to invest in riskier assets are now closing these positions to avoid higher borrowing costs and repay debts. This has led to a sell-off in both the stock and crypto markets, with additional pressures stemming from geopolitical tensions in the Middle East and recessionary risks in the US.
The decline in the crypto market has been further exacerbated by over $1 billion in liquidations in the last 24 hours, with a significant portion of that amount coming from long positions. The open interest in the crypto futures market has also dropped by approximately 15% during the same period. This suggests that many traders were overly bullish and heavily leveraged, leading to a cascade of liquidations when the market moved against their positions.
Furthermore, the market sentiment among futures traders has turned bearish, as indicated by negative funding rates for top coins like Bitcoin and Solana. This could potentially lead to further downward pressure on prices as shorts dominate the market.
The current losses in the crypto market are part of a descending triangle breakdown move, which is considered a bearish reversal pattern in uptrends. As of August 5, the crypto market capitalization had entered the breakdown stage, with a potential downside target of $1.596 trillion. Investors and traders are advised to conduct their own research and exercise caution when making investment decisions in such volatile market conditions.