Crypto Landscape August Week 3

Disclaimer

This is not financial advice and should not be taken as such. This is merely an opinion article.

Bitcoin's Roller Coaster Ride: The Yen Carry Trade Effect and more uncertainty ahead.

As we enter the third week of August 2024, the cryptocurrency market, particularly Bitcoin, continues to experience significant volatility. This week's report focuses on recent price movements, market sentiment, and the crucial role of the yen carry trade in recent market turbulence. We'll discuss last week's crash, the subsequent recovery following the Bank of Japan's change in stance, and the continued decline from $60,000.

Bitcoin's Recent Price Movement

Bitcoin has experienced a sharp decline, falling below the critical $60,000 level. As of August 12, 2024, BTC was trading at approximately $58,270, representing a 4.8% drop in the last 24 hours. Figure 1 off-chain Bitcoin price

This pullback has erased the gains from earlier in the week when Bitcoin briefly touched $62,000 following the Bank of Japan's confirmation that there would be no more interest rate hikes, which stabilized the volatility index (VIX).

The Yen Carry Trade and Its Impact on Bitcoin

The recent market turmoil can be largely associated with the unwinding of the yen carry trade, a popular strategy that had significant implications for Bitcoin and the broader crypto market.

What is the Yen Carry Trade?

The yen carry trade involves borrowing money in Japanese yen (which has had extremely low interest rates) and investing in higher yielding assets, including stocks, high yield bonds and cryptocurrencies like Bitcoin. This strategy had become increasingly popular, with yen-denominated loans to foreign borrowers reaching approximately $2 trillion by 2024, a 50% increase from two years prior.

The Bank of Japan's Policy Shift

On July 31 2024, the Bank of Japan (BOJ) raised rates on short-term government bonds from 0% to 0.25%. This seemingly small change triggered a series of events that led to a significant market downturn as although in absolute terms the increase was small borrowers had been accessing a free lunch in terms of borrowing with near zero percent interest rates prior to the news of an increase.

Impact on Bitcoin and Crypto Markets

1. Yen Strengthening: The BOJ's rate hike caused the yen to strengthen rapidly against other currencies.
2. Increased Borrowing Costs: As the yen strengthened, the cost of yen-denominated loans increased significantly - Although the rate has risen a small amount in absolute terms this would have a significant impact on borrowers whom were expecting a free lunch.
3. Forced Liquidations: Traders who had used yen-denominated loans to finance leveraged positions in Bitcoin and other cryptocurrencies were forced to liquidate their positions.
4. Market Crash: This led to a cascade of selling, causing Bitcoin to plummet by around 18% and Ethereum by 26% in a single day.

Market Sentiment and ETF Flows

The market downturn is reflected in the outflows from U.S.-listed exchange-traded funds (ETFs). On Friday, August 9, Bitcoin ETFs saw outflows of $89 million, while Ethereum ETFs experienced $15.7 million in outflows. These figures suggest a cautious sentiment among institutional investors.

Technical Analysis and Market Dynamics

Liquidations and Leverage

The recent crash highlighted the risks of excessive leverage in the crypto market. In the 24 hours between August 4-5, over $1 billion in leveraged trading positions were liquidated and believed to be even more than this figure. This massive deleveraging has reduced the total open interest in the crypto market from nearly $40 billion to around $27 billion.

Support Levels and Future Outlook

It is believed that the key first-test lines for Bitcoin at around $55,000. This level could serve as crucial support. A bounce off this level might lead to retesting higher prices, while a weaker response could result in further downside movement. Figure 2 Support levels Bitcoin price

Japanese Stock Market Crash and Global Impact

The BOJ's policy shift not only affected cryptocurrencies but also caused significant turmoil in traditional markets. The Nikkei 225 stock index fell by 12% on August 5, marking its worst one-day drop since 1987. This decline in Japanese stocks further amplified the global market sell-off, including in cryptocurrencies.

Recent Market Recovery and Subsequent Downturn

Following the initial shock, markets showed signs of recovery. Bitcoin briefly reclaimed the $60,000 level last week. However, the recovery has been short-lived, with Bitcoin once again retreating below this psychological barrier. This recent downturn suggests that market participants remain cautious and that the effects of the yen carry trade unwinding may still be reverberating through the markets alongside the fear of recession.

Potential for Market Rebound

Despite the recent turmoil, there are reasons for cautious optimism:

1. Deleveraging: The massive liquidations have reduced market leverage, potentially creating a healthier market environment.
2. Yen Stabilization: According to some analysts, the USD/JPY exchange rate may not have much room left to fall, which could stabilize borrowing costs.
3. Potential Rate Cuts: The severe market reaction might prompt central banks, including the BOJ and the Federal Reserve, to consider more accommodative policies.

Conclusion

The recent market turbulence, triggered by the unwinding of the yen carry trade, has highlighted the interconnectedness of global financial markets and the potential risks of leveraged trading. While the short-term outlook remains uncertain, the deleveraging process may ultimately lead to a healthier and more stable market environment for Bitcoin and other cryptocurrencies.

At Wevr, we continue to provide cutting-edge tools and comprehensive market insights to help navigate these challenging times. Our on-chain analytics, whale tracking capabilities, and advanced charting tools offer valuable insights into market movements and sentiment.

We encourage our clients to leverage the extensive resources available at Wevr to make informed decisions in this complex market environment. Stay connected with our community on Twitter and keep up with the latest insights on our Blog.

Remember, in the world of cryptocurrency, knowledge is power. Stay informed, stay analytical, and let Wevr be your guide through the exciting world of digital assets.