Why is crypto crashing right now?

What are the global triggers that led to this massive crypto market crash? Continue reading

The crypto market has crashed brutally, sending shockwaves through the financial world. As of August 5, the global crypto market cap reached $1.81 trillion, a staggering 15.88% drop in just one day, triggering extreme panic and strong signs of a bear market.

Bitcoin (BTC) has lost over 25 percent of its value in the last seven days, with about 15 percent of that decline occurring in the last 24 hours, and is trading at $51,300 as of August 5.

BTC price chart | Source: TradingView

Ethereum (ETH) has performed even worse, falling by 32% in the last week and more than 21% in the last day, and is trading at $2,238 at the time of writing.

ETH price chart | Source: TradingView

Other altcoins have also been hit hard, with losses of 40-50% over the week and 15-25% in the last 24 hours.

The turbulence is not limited to the cryptocurrency market alone. Major global equity indices such as NASDAQ100 (US), FTSE100 (UK), and NIFTY50 (India) saw sharp declines of 2-3% in a single trading session.

Japan’s Nikkei225 index took the biggest hit, falling nearly 14 percent in one day, its biggest drop since 1987.

So why is crypto crashing right now? What are the global triggers that are causing this widespread panic and dragging down all financial markets? Let’s take a look at the root causes behind this market turmoil.

What happened to the cryptocurrency market: Deciphering the factors behind US recession fears

The recent crypto market crash is not happening in isolation. The US job market is showing signs of trouble, fueling fears of a recession.

The unemployment rate rose to 4.3 percent in July, the highest level in almost three years, according to data released on August 2. That’s up significantly from 4.1 percent in June and a 50-year low of 3.4 percent in April last year.

Goldman Sachs economists have raised the probability of a recession in the US next year from 15% to 25%, Bloomberg reported.

Still, they noted that despite the rise in unemployment, there were “few reasons not to fear a recession.” “The economy continues to look good overall, there are no major financial imbalances, and the Fed has plenty of room to cut interest rates and can do so quickly if necessary,” Goldman economists wrote.

But there are also concerns that the Federal Reserve is “waiting too long” to cut interest rates. The Goldman report suggests that if job growth picks up in August, a 25 basis point (bps) cut would be enough to address any downside risks. But if the August employment report is as weak as July’s, a 50 basis point cut could be needed in September.

Rising unemployment and fears of a possible recession are creating a ripple effect as investors become more risk averse and move away from volatile assets like crypto, leading to a massive sell-off in the crypto space.

When people fear a recession, they sell risky investments and move into safer assets like cash, gold or government bonds.

Nikkei 225 crash

Japan’s financial system is going through some critical changes, and these changes are creating ripples in markets around the world.

On July 31, Japan’s central bank raised its benchmark interest rate to “about 0.25%” from the previous range of 0% to 0.1%. This was the second time the Bank of Japan (BOJ) has raised interest rates this year, the first being on March 19, and marking the first rate hike since 2007.

While the move is aimed at benefiting Japan’s economy, it has a negative impact on the carry trade, a popular strategy among forex investors and fund managers.

A carry trade involves borrowing in a currency with a low interest rate and investing it in assets that yield higher returns. When Japan raises interest rates, this makes new borrowing more attractive, disrupting this strategy and causing global financial adjustments.

The impact of Japan’s interest rate hike was felt immediately, with the Nikkei 225 stock index falling 12.4% on August 5, triggering a widespread sell-off.

One factor that prompted the Bank of Japan to raise interest rates was the prolonged weakness in the Japanese yen, which pushed inflation above the central bank’s 2 percent target.

The dollar was trading at 142.59 yen on the morning of Aug. 5. It was trading at 146.45 on Friday evening, well below its high of over 160 yen a few weeks ago.

The market sell-off in Japan is not happening in isolation. Stocks began falling globally on Aug. 2 after weaker-than-expected U.S. jobs data sparked concerns that higher interest rates could push the U.S. economy into recession.

This concern is compounded by Japan’s interest rate hike, which adds a new layer of complexity to the global financial picture.

The current scenario, where both the US and Japanese markets are showing signs of stress, is causing investors to reassess their positions. As a result, there has been a massive sell-off in riskier assets, including cryptocurrencies.

Geopolitical troubles

Geopolitical tensions are another major factor affecting the crypto market. On August 3, tensions in the Middle East escalated as Iran and its allies prepared their response to the assassination of Hamas leader Ismail Haniyeh in Tehran, an act they blamed on Israel.

The incident led Iran and the “axis of resistance” to vow revenge after the killing of Hezbollah’s military chief in Beirut, creating fears of a regional war.

Meanwhile, Israel’s ally, the United States, announced it would move warships and fighter jets into the region. Western governments urged their citizens to leave Lebanon, the centre of the powerful Iran-backed Hezbollah movement, and airlines cancelled flights.

Iranian-backed groups from Lebanon, Yemen, Iraq and Syria are already involved in the ongoing conflict between Israel and the Palestinian militant group Hamas in Gaza.

Fears of a regional war and its potential global impact could lead to a major sell-off in the crypto market as investors seek stability. Geopolitical instability often leads to increased volatility in both traditional and crypto markets.

What’s next?

As the cryptocurrency market continues its decline, let’s examine the views of some of the prominent names in the industry and analyze their perspectives on the situation.

Prominent macroeconomist Alex Krüger suggests that the current fiasco is due to macroeconomic factors rather than crypto-specific issues.

Krüger argues that the policy mistake was not that the Fed did not cut interest rates quickly enough, but that it did not cut interest rates while Japan was raising interest rates, which led to a financial crisis triggered by leveraged Japanese speculators, a less serious scenario than a crisis in the US that he believes would have been caused by a recession.

This disaster is clearly macro-focused rather than crypto-specific, and it turns out the main driver isn’t the collapse of the US economy (recession talk picked up after last Friday’s payrolls).

The policy mistake, it turns out, is not that the Fed didn’t cut rates quickly enough, but rather… picture.twitter.com/PjTU7v2ZUY

— Alex Krüger (@krugermacro) August 5, 2024

Meanwhile, Tron (TRX) founder Justin Sun remains optimistic despite the market decline, arguing that the industry has grown over the past year and that current market fluctuations are not due to negative news.

Don’t worry! The industry has grown significantly in the past year, and this market volatility is not due to negative news. We must reject FUD and continue to build. That’s why we are creating a $1 billion fund to combat FUD, drive more investment, and provide liquidity. 🙏

— HE Justin Sun 孙宇晨 (@justinsuntron) August 5, 2024

In these turbulent times, you must remain vigilant and informed. Diversify your portfolio to reduce risks and avoid putting all your eggs in one basket.

Consider placing stop-loss orders to protect your investments from further declines. Don’t make impulsive decisions based on fear or market hype, and never invest more than you can afford to lose.