5 factors behind the crypto selloff
Bitcoin briefly fell under $50,000 on Monday before regaining ground.
There’s never a dull moment on the blockchain. Here’s what you need to know this week:
Crypto saw its biggest selloff since 2022. A closer look at the macroeconomic currents that are roiling global and crypto markets alike.
Market watchers weigh in on the recent volatility. Rounding up analysts’ takes on what might happen next.
This week in numbers. Bitcoin’s crypto market “dominance,” the amount of ETH that is currently staked, and more stats to know.
MARKET BYTES
Five key factors that triggered crypto’s biggest selloff in two years
Bitcoin and Ethereum started this week with their worst selloffs since the 2022 collapse of FTX, as a wide variety of macroeconomic factors combined to shake markets around the world.
After climbing above $70,000 last week, bitcoin fell by 30% to as low as $49,121 on Monday. Ethereum declined even more, falling about 35% in the same span. And between Sunday morning and Monday morning, crypto’s total market cap fell by 13%, the biggest single-day drop in more than two years.
By Tuesday, however, crypto prices began to rebound: BTC ticked back above $55,000 and ETH topped $2,500 as many traders appeared to “buy the dip” at discounted prices.
But what exactly triggered the selloff? Here’s a rundown of five big factors.
1. A big spark came from a weak U.S jobs report
Last Friday, a weaker than expected U.S. jobs report revealed that unemployment had hit a three-year high of 4.3% and the economy added 36% fewer jobs than expected in July.
With job growth appearing to sputter, investors across many asset classes, including crypto, began to sell. The VIX, a measure of market volatility, shot up to its fourth-highest level in decades, behind only 1987’s Black Monday, 2008’s collapse of Lehman Brothers, and 2020’s COVID crisis.
2. U.S. interest rates remained at two-decade highs
At last week’s meeting of the Federal Open Market Committee, the Federal Reserve opted to hold interest rates steady at two-decade highs. While Fed Chairman Jerome Powell signaled that cuts could be coming as soon as the next meeting in September, he stressed that no decision had been made, leaving markets in a holding pattern.
The combination of historically high interest rates and a cooling labor market combined to make traders jittery about the likelihood of the Fed cutting rates in September. (As of Wednesday, wagers on Polymarket were assigning a 46% chance of a 0.50% rate cut in September.)
3. Japan surprised markets by raising interest rates
For the first time in 17 years, Japan raised interest rates by 0.25% last week — a move that cascaded through global markets in part because it began to unwind a popular investment strategy known as the “Japanese yen carry trade.”
For years, traders were able to borrow yen at close to zero percent interest rates and invest that capital in higher-yield assets like tech stocks. But with rates on the rise and the yen up 10% against the U.S. dollar in just three weeks, many were forced to unwind those “carry trades,” contributing to the selloff in risk assets.
4. Leveraged trades accelerated the downturn
One reason carry trade investors needed to unwind their positions is that they were made using leverage — another word for borrowed capital.
The confluence of rising rates, a rising currency, and falling markets likely led to margin calls for many speculators — meaning they were forced to sell once markets began plummeting — adding fuel to the selling pressure created by other factors.
For crypto specifically, the downturn triggered around $1 billion in liquidations, with more than 275,000 crypto futures trades liquidated between Sunday and Monday morning (including around $420 million in BTC trades and $340 million in ETH trades). About 87% of the liquidated traders were using leverage to bet on prices going up, reports CoinDesk.
5. BTC ETFs saw major outflows
After five straight weeks of inflows — and the debut of spot ETH exchange-traded funds (ETFs) last month — crypto investment products saw significant outflows as global markets turned south.
In four days ending Monday, BTC ETFs saw around $423 million in outflows, according to Bloomberg.
But it’s not all bad news. As ETH prices bottomed out around $2,100 on Monday, ETH ETF flows turned positive, with traders “buying the dip” to the tune of about $50 million.
The bottom line…
All eyes are now on the Federal Reserve, which some market watchers believe could decide to make an emergency rate cut in advance of September’s meeting.
In the meantime, one takeaway from Monday’s dip is how larger and smaller investors handled the situation differently.
“Bitcoin whales, or large asset holders, seized the opportunity of lower prices to purchase, while small investors sold as the panic ensued, data by blockchain analytics firm IntoTheBlock shows,” reported CoinDesk.
So what are some strategies for managing down markets? We have you covered…
SOUND BYTES
Experts weigh in on this week’s downturn — and what might happen next
After a “perfect storm” hobbled markets of all kinds to start the week, analysts took stock of what happened and where things might be headed next.
We rounded up some of what they had to say.
Zach Pandl, Grayscale head of research
The chief analyst for crypto-investment giant Grayscale suggested that this week’s volatility was driven by poor monetary policy, and is all the more reason for traders to allocate some capital to BTC.
“[Governments’] undisciplined approach to monetary and fiscal policy is one of the reasons investors hold bitcoin in the first place, so there is no reason to reconsider the longer-term bullish outlook for the asset class,” Pandl said.
Antoni Trenchev, Nexo cofounder
The crypto-wallet exec noted that volatility is nothing new for crypto and pointed out that markets began trending back upward by Tuesday.
“Thirty percent slumps, as scary as they are, are par for the course during bull markets and it’s encouraging [that] bitcoin bounced back above $50,000,” said Trenchev. “But make no mistake, we are in a choppy, volatile market environment.”
Rich Rosenblum, co-chief executive officer and co-founder of GSR Markets
The institutional crypto firm’s co-CEO remains optimistic despite the turmoil.
“It was only nine days ago that the BTC community was arguably the most bullish it’s ever been,” Rosenblum said in an interview with Bloomberg. “BTC could rally back to $70,000-plus, just as quick as it sold off.”
Jeremey Siegel, WisdomTree chief economist and professor emeritus of economics at the Wharton School of Business
Siegel argued that the U.S. Federal Reserve should make an emergency interest-rate cut in advance of the cut predicted for September to prevent further pain down the road.
“If they are going to be as slow on the way down as they were on the way up, which, by the way, was the first policy error in 50 years, then we’re not in for a good time with this economy,” Siegel said.
Matt Hougan, Bitwise Asset Management CIO
Bitwise is one of the firms behind this year’s new ETH and BTC ETFs, and the company’s top investment exec suggested that Monday’s price action was a temporary correction.
“We have a global capital market sell-off that impacted the crypto market on a low liquidity weekend, but nothing has changed fundamentally about bitcoin or about crypto except that we’re closer to the Fed lowering rates, we’re closer to quantitative easing,” Hougan told CNBC. “I see that as more of a catalyst than a headwind.”
David Duong, Coinbase head of institutional research
Coinbase’s latest Market Intelligence report predicts a “choppy market” in the third quarter of 2024, but doesn’t anticipate the beginning of a “new market cycle” in a bearish direction.
“We believe that these market jitters will persist in the short-term, but it’s possible that shorts could get squeezed here, which could lead to a market rebound in the next few days,” wrote Duong. “But don’t be fooled into thinking that this market disruption is over.”
NUMBERS TO KNOW
$54 billion
Trading volume reached on Solana-based decentralized exchanges in July, surpassing Ethereum’s $52 billion. Largely driven by memecoin trading, this is the first time SOL has outperformed ETH by this metric, reports the Defiant.
34 million ETH
Approximate amount of ether that is currently staked on Ethereum’s blockchain, a record high. Staking allows the Ethereum blockchain to validate transactions, maintain security, and reward participating holders.
60%
Bitcoin’s “dominance” (or share of the total crypto market) as of Monday, up from 51% on Friday, per The Block. Even though BTC’s price dropped at the beginning of the week, its dominance spiked as other cryptocurrencies including ETH, Doge, XRP, and SOL, among many others, lost even more in value relative to the broader crypto market.
TOKEN TRIVIA
Which cryptocurrency uses the Lightning Network?
A
BTC
B
ETH
C
SOL
D
All of the above
Find the answer below.
Trivia Answer
A
BTC
