Five reasons behind the August 5th’s crypto market crash

1. The Japan Carry Trade Effect: A Ripple in the Financial Pond

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• What is the Carry Trade? It’s a strategy where investors borrow money in a country with low-interest rates (like Japan) to invest in countries with higher returns, such as the US. It’s like getting a cheap loan in one currency to buy assets in another that’s expected to give you more profit.
• Why Did It Matter? For years, investors have borrowed in yen at near-zero rates, investing in higher-yield assets globally. This 25 basis point increase may seem minor, but it was enough to trigger a massive sell-off, as the cost of borrowing suddenly became less attractive. When Japan decided to slightly increase its interest rates, it disrupted this strategy. Investors had to quickly sell off their assets to repay the loans, causing a sell-off that affected global markets, including crypto.
• Event: Japan’s interest rate hike of 25 basis points was the catalyst.
• Analysis: This minor adjustment sparked a massive deleveraging event, affecting yen-carry trade, where an estimated $10-20 billion needed to be unwound, impacting global markets, including crypto.
• Impact on Crypto: The resulting market turmoil led to a loss of confidence and a ripple effect across all markets, including crypto.

2. US Economic Data: Reading the Tea Leaves

source: US Unemployment Rate Monthly Analysis: Employment Situation | YCharts

• What’s the Big Deal About Jobs Data? The number of jobs created or lost can signal the health of an economy. If more people are unemployed than expected, it might mean the economy is slowing down, which can scare investors.
• How Did It Affect Crypto? A recent jobs report showed higher unemployment than anticipated, suggesting the US economy might be weaker than thought. This led to fears of a recession, causing investors to pull out of riskier assets, including cryptocurrencies.
• Event: US unemployment rate reported at 4.3%, higher than the expected 4.1%.
• Analysis: Economists and investors watch unemployment figures closely as they can indicate economic health. A higher rate suggests weaker economic performance, which can deter investment. This discrepancy, coupled with an inverting yield curve, has heightened recession fears, traditionally a harbinger of market downturns, including crypto assets.
• Impact on Crypto: The unexpected rise in unemployment stoked fears of a recession, prompting a risk-averse approach and a retreat from volatile assets like cryptocurrencies.

3. Political Winds: The Impact of Election Polls

source: Kamala Harris vs. Donald Trump: Latest Polls in 2024 Presidential Election - The New York Times

• Why Do Polls Matter? The outcome of elections can influence economic policies, which in turn can affect markets. If investors think a new administration might implement policies that could hurt the market, they might start selling off assets.
• What About Crypto? Recent polls suggested a change in political leadership could be on the horizon, with potential implications for crypto regulations. This uncertainty made some investors nervous and led them to sell off their crypto assets.
• Event: Prediction markets show a tightening race, with Harris gaining momentum.
• Analysis: The crypto community has been closely watching political developments due to their potential regulatory impact. The potential policy changes under a Democratic administration are viewed with apprehension by the crypto community, given past regulatory actions, affecting market sentiment.
• Impact on Crypto: The prospect of a Harris presidency, with his administration’s past actions towards crypto, led to uncertainty and a sell-first, ask-questions-later attitude among investors.

4. Geopolitical Tensions: The Middle East’s Ripple Effect

Why Are Conflicts a Concern? Conflicts in regions that are important for global resources, like oil in the Middle East, can disrupt supply and cause prices to spike. This can lead to inflation and higher interest rates, which can affect investment decisions.

• How Did It Hit Crypto? The threat of conflict involving Iran raised concerns about possible disruptions to oil supplies. This led to a rush for safer assets and a sell-off in riskier ones, including cryptocurrencies.
• Event: Increased military actions in the Middle East, particularly involving Iran, have raised global security concerns.
• Analysis: The Middle East is a pivotal region for global oil supply. Any threat to this supply can lead to oil price volatility, affecting global markets. The threat of disrupted oil supplies from a region accounting for 40% of the world’s daily oil production could spike inflation and keep interest rates high, impacting investor behavior in the crypto space.
• Impact on Crypto: The potential for conflict disrupting oil supplies raised concerns about inflation and economic stability, causing investors to move to safer assets and away from riskier ones like crypto.

5. Crypto-Internal Shocks: The Sudden Sell-Off

What Happened with Market Makers? Market makers are firms that help keep markets liquid by buying and selling assets. When they have to sell off large amounts of assets quickly, it can flood the market and lower prices.

• Why Did This Affect Crypto? Major market makers had to sell large amounts of crypto assets due to regulatory actions and redemption requests. This sudden influx of assets on the market led to a drop in crypto prices.
• Event: Five of the top market makers sold a combined total of 130,000 ETH, valued at nearly $290 million at current prices, causing Ether’s value to plummet from $3,000 to below $2,200. Among the top market makers, Wintermute led the sell-off with over 47,000 ETH sold, followed by Jump Trading with over 36,000 ETH, and Flow Traders with 3,620 ETH. GSR Markets and Amber Group also participated, selling 292 ETH and 65 ETH respectively, according to research by 0xScope.
• Analysis: Market makers play a crucial role in maintaining liquidity. When they exit the market, it can lead to a sharp decrease in liquidity and an increase in asset prices, causing a cascade effect.
• Impact on Crypto: The sudden selling by major players created a glut in the market, driving down prices and exacerbating the market’s downward spiral.

Conclusion:

The crash on “Black Monday” was a result of a perfect storm of factors that are easy to understand when broken down. It’s a reminder that the crypto market, like any other, is influenced by a variety of forces, from economic data to geopolitical events to internal market dynamics.

Investment Strategy Simplified:

• Don’t Panic: Market downturns can be stressful, but they’re also a normal part of investing.
• Diversify: Spreading your investments across different types of assets can help reduce risk.
• Think Long-Term: If you’re in it for the long haul, temporary dips can be opportunities to buy more of an asset at a lower price.

Disclaimer:

This article is for informational purposes only and should not be taken as financial advice. Always do your own research and consider your financial situation before making investment decisions.