The first week of August 2024 got off to a miserable start for risk asset investors across the globe.
Major equity markets in the U.S., Europe, Japan, Australia, South Korea, and India were battered on August 5, 2024.
Bitcoin (BTC) mirrored equity market losses to fall below the $50,000 mark for the first time in nearly five months.
Meanwhile, Ethereum (ETH) bore the brunt of the selloff as the premier altcoin fell as much as 21% on the day.
Why is crypto crashing today? As we try and answer that, we will also look forward and analyze whether Bitcoin crashing is an opportunity to buy the dip.
Why is the Crypto Market Down?
The recent crash in cryptocurrency prices can be mainly attributed to macroeconomic factors:
U.S. Fed’s Rate Hike Cycle
Let’s rewind to March 2022, when the U.S. Federal Reserve (Fed) hiked interest rates for the first time in two years to quell inflation in the country. The March 2022 hike marked the start of a global monetary tightening cycle that saw central banks across the world raise borrowing rates to keep up with the Fed.
The Fed was very aggressive in its fight against inflation, raising interest rates from 0.25% in March 2022 to 5.5% by July 2023.
The last time the Fed undertook such a strong measure — raising rates from 1% in June 2004 to 5.25% in June 2006 — it was preceded by the Great Recession of 2007-2008.
Investors now fear that history could repeat itself, having seen unemployment rates in the U.S. rise consistently over the past year. A contraction of U.S. factory activity for four straight months between April 2024 to July 2024 has also reinforced recession fears.
“Historically, the likelihood of a recession in 2025 is high, and the stock market typically anticipates such downturns well in advance,” said Markus Theilen of 10x Research in a note.
The crypto crash today may also make sense when we understand that the institutionalization of cryptocurrencies has made the digital asset market more sensitive to macroeconomic forces than ever before.
Financial institutions, hedge funds and professional investors are selling Bitcoin and altcoins as they prepare for a potential recession.
Anndy Lian, intergovernmental blockchain expert and author of ‘Blockchain Revolution 2030’ told Techopedia:
“Global recession fears can significantly impact cryptocurrency prices, primarily due to investors’ heightened risk aversion. When economic indicators suggest a potential downturn, investors often shift their capital from riskier assets like cryptocurrencies to safer investments such as government bonds or gold.
“This flight to safety can lead to a sell-off in the crypto market, driving prices down.”
Unwinding of Japanese Yen Carry Trade
Many also attributed the fall in the risk asset market that occurred in early August 2024 to the unwinding of the Japanese Yen carry trade.
The Japanese central bank has historically maintained zero-to-negative interest rates in order to boost economic activity and counter deflation in the island nation.
However, in March 2024, the Bank of Japan (BoJ) ended the era of negative interest rates for the first time in 17 years by increasing short-term interest rates to 0-0.1%.
On July 31, 2024, the BoJ raised rates further to 0.25%, making it more expensive to borrow the Japanese yen.
The Yen had been a favourite among investors as a carry trade option, where investors borrow money at a lower interest rate to invest the borrowed sum in assets that can provide higher returns.
“The BoJ’s rate hike last week (on July 31, 2024), which played a key role in the subsequent market meltdown, showed that you can’t unwind the biggest carry trade of the century without breaking a few heads,” said Presto Research in an email newsletter.
Should I Buy the Dip?
With BTC trading over 26% below its all-time high price ($73,750 in March 2024) and ETH trading at six-month lows, investors may be thinking of buying the crypto dip.
We asked Techopedia’s panel of crypto experts for their thoughts on the subject.
Shiven Moodley, chief operating officer and macro strategist at brokerage firm 80eight Group, said:
“As a trader, I am buying the dip. Support levels of around $42,000 and $38,000 (for BTC) support accumulation in my thesis that the price will move back above $75,000 towards the end of the year.
“There is positive long-term anticipation for price action ahead of the election in the U.S.”
Meanwhile, Sergei Chmel, managing partner of alternative investment firm SeQuant Capital quoted legendary investor Warren Buffet and said:
“Be brave when others are fearful, and be fearful while others are brave.
He added: “DCA [dollar cost averaging] is the best strategy for a long-term horizon. Trading is a path to poverty.”
Interestingly, Buffett’s company, Berkshire Hathaway, seems to have followed his advice by selling 390 million Apple shares in the second quarter of 2024, just before Apple shares hit an all-time high in mid-July 2024. Berkshire Hathaway held a cash stake of over $276 billion as of June 30, 2024
Elsewhere, 10x Research warned that long-term investment strategies like HODLing and DCA in BTC and ETH have not been favorable since 2021.
“Bitcoin is primarily a momentum trading game where the trend is your friend—until it isn’t. While we can outline potential cycle developments, trading the peaks and troughs requires reacting to breakdown or breakout signals.
“This approach might result in losses when false buy signals occur during rallies, but effective risk management, such as using stop-loss orders, can protect most traders’ capital.”
BTC Hedge Criticism
Crypto’s crash alongside global equity markets in early August 2024 invited criticism from a section of the crowd who questioned the popular crypto narrative that Bitcoin is a hedge against global economies and a good asset for diversification.
Joe Weisenthal, editor at Bloomberg, said Bitcoin – often dubbed “digital gold” – was looking “a lot more like Nvidia than it does gold.”
Elsewhere, Beat Nussbaumer, founder of MacroBeat, wrote:
“BTC dropped some 10% to 52.3K….that much for a store of value…. at some point, people will finally see it for what it is… just another risky asset.”
Michael Nadeau of the DeFi Report newsletter explained crypto’s correlated crash with the global equity market, saying:
“While crypto is generally uncorrelated to traditional markets, correlations quickly move to 1 during macro/liquidity events. All assets are correlated during these times, with crypto being much more volatile (why you never play with leverage).”
Outlook for Crypto Market
Macroeconomics will continue to be a key driver of risk asset markets over the near term as the U.S. Fed prepares to embark on a rate cut cycle that is expected to start in September 2024.
While rate cuts are typically seen as bullish events for risk asset markets, the underlying conditions — slow hiring, rising unemployment, and contracting manufacturing activity — have compelled investors to take a cautious stance.
“As noted earlier this week, if the Federal Reserve cuts rates after a prolonged hiking cycle solely due to weaker inflation, stocks (and Bitcoin) should interpret the first cut as bullish.
“However, if a weak economy drives the cut — as was the case in 2001 and 2007 — stocks (and Bitcoin) are likely to decline,” said 10x Research.
Looking forward, we asked Techopedia’s expert panels for their outlook on the crypto market.
Moodley said:
“BTC has some consolidation support levels of around $42k and $ 38k, which would interest many whales. While ETH has breached a two-standard deviation move, any more volatility could see us break the $2000 key support level toward $1800”
Sergei said:
“Regarding Bitcoin and its role as a hedge, one thing every investor should understand and remember about Bitcoin is that it is a perfect hedge in a medium-and-long term time horizon, but because it’s one of the most liquid assets in the world, in moments of panic investors rush to sell what they can.”
The Bottom Line
As this article goes to press, the crypto market has bounced back from the Monday market crash. Investors are buying the dip as we speak with BTC rising over 10% and ETH jumping over 14% on August 6, 2024 in early Asia trade.
If you are thinking of investing in risk asset markets, remember to always do your own due diligence before investing. Market analysts and experts can be wrong, and the future cannot be predicted. This article should not be taken as financial advice and is for informational purposes only.
Source: https://www.techopedia.com/news/why-is-crypto-market-down-today-time-to-buy-the-dip
Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.
Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.
An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.
