Key Takeaways
Stock and crypto markets have experienced significant volatility in recent days. Macroeconomic, political, geopolitical, and crypto-specific factors have been key contributors.
Despite these challenges, we do not view this as indicative of a long-term negative trend for the crypto market. We highlight a few indicators to look out for in the latter part of this report.
The Market Downturn
The past twenty-four hours have been challenging for the crypto market, with most major tokens down double digits across the board. In the same period, the total crypto market capitalization has fallen almost 20% from US$2.16T to US$1.76T. This recent plunge is the latest chapter in a broader downward trend that commenced last Monday, July 29. Since then, the total market capitalization has fallen from US$2.48T to where it currently sits, a 28% decline within a week.
Figure 1: After over 5 months of range bound price action, the total crypto market cap has plummeted 28% within a week
When examining the performance of the top tokens by market capitalization, one trend is clear: no tokens have been spared from the recent decline. Out of the top 10 non-stablecoin, non-derivative assets, DOGE has had the worst 24H performance, experiencing a drawdown of 22.7%. Conversely, TRON showed the greatest strength, being 7.1% down on the day.
Figure 2: Out of the top 10 assets by market cap, DOGE experienced the largest 24H drawdown of 22.7%
The decline in token prices has also triggered significant liquidations. Traders across major exchanges experienced over US$819M in liquidations (~US$688M in longs, ~US$131M in shorts) on August 5, the greatest daily volume of liquidations since April 13, 2024.
Figure 3: Traders across major exchanges experienced over US$819M in liquidations on August 5
Drivers of Market Weakness
A few factors may have contributed to the market weakness. We summarize certain key drivers in the following section.
1. Macroeconomic Weakness and Spillover
Global stock market indices have traded significantly lower in the past few trading days. Concerns of a hard landing in the U.S. and a significant downturn in Tokyo’s stock markets have investors on their toes. The risk-off sentiment has spilled over to the crypto market, as investors exercised caution and took chips off the table.
Recession worries in the U.S. have risen following weaker-than-expected employment data last Friday. The unemployment rate rose to 4.3%, its highest since October 2021, and job growth in June came in lower than expected (non-farm payrolls rose by 114,000 vs. 175,000 expected). This sparked a broad sell-off in U.S. stocks, with the Nasdaq being the first major U.S. stock market benchmark to enter correction territory, with a decline exceeding 10% from its record high. Overall, the poor data prompted concerns among investors that the Federal Reserve could be too slow in lowering interest rates to avert a recession.
Figure 4: U.S. unemployment rate ticked up to the highest level since October 2021
Stock markets in Asia also suffered a similar rout as the MSCI Asia Pacific Index fell 6.7%, erasing most of its gains for the year. Notably, Japan was at the epicenter of the selloff after its stock market entered bear market territory, with the Nikkei 225 Index plummeting 12.4% on Monday – its worst day since 1987.
Figure 5: Nikkei 225 fell 12.4% in a single trading day, marking its worst performance since the “Black Monday” of 1987
Tokyo equities were affected by a strengthening currency, as the Japanese yen has appreciated around 12% since mid-July. This follows an interest rate hike by the Bank of Japan, which has effectively caused much pain for investors who have engaged in the “carry trade” strategy (borrowing the yen, which has had a low interest rate, and reinvesting the proceeds in a currency with a higher rate of return, such as the U.S. dollar). The strong yen has also resulted in selling pressure from the aforementioned investors repaying their yen debt, which has been a contributor to lower U.S. equity prices.
Figure 6: The JPY has strengthened nearly 12% against USD since mid-July.
2. Headwinds Coming From the United States
In the political news, U.S. Vice President Kamala Harris is seeing growing approval among voters as a potential candidate in the upcoming U.S. election. The decentralized prediction platform Polymarket currently forecasts a 44% chance of Harris winning, up from approximately 30% when the current President Biden withdrew and endorsed her as his successor. Harris has yet to match Trump’s recent pro-crypto rhetoric. This could be a factor that has investors concerned.
Additionally, latest filings showed that last quarter, Warren Buffet’s Berkshire Hathaway sold nearly half of its Apple stake alongside other equity holdings, bringing its cash pile to a record high of US$276.9B. The decision to increase cash holdings by the Oracle of Omaha could have some investors worried over the future price action of equities, particularly those of the technology and growth variety.
3. Geopolitical Tensions
Tensions in the Middle East appear to be escalating, with the conflict between Iran and Israel being a key point of concern.
Market participants may undoubtedly be worried about potential macroeconomic and geopolitical ramifications of the standoff. Anecdotally, the defense manufacturer, Lockheed Martin, has seen its stock price jump ~20% over the past month, as investors anticipate further tensions.
The growing fear and geopolitical uncertainty are likely prompting investors to exercise caution regarding risk assets, further contributing to the market downturn.
4. Large-Scale On-Chain Transactions
In addition to the above factors, which have been largely macroeconomic and political, there has also been some crypto-specific tension in the market.
There have been a number of reports of Jump Crypto, the crypto arm of Jump Trading, liquidating many of its positions, particularly ETH. There have been rumors that Jump could be exiting the crypto market-making business and thus has been slowly closing its positions. While these rumors are not confirmed, their on-chain wallets, as tagged by Arkham, have shown significant activity, including ~US$300M of staked ETH being sold from one wallet alone.
The U.S. spot ETH ETFs have also had muted performance since their launch, recording inflows on only three out of nine trading days. Total net flows stand at US$511M of outflows.
These factors may have contributed to the volatility, especially the Jump Crypto news, considering their size and influence in the market. As these news have also been ETH-focused, they have also likely contributed to the relative underperformance of ETH in comparison to other major tokens.
With sharp declines in equity markets and weaker-than-expected economic data, attention is focused on the next U.S. monetary policy decision. Markets are now factoring in multiple rate cuts for the remainder of the year, including a potential 0.50% cut in September, a dynamic significantly diverging from the July Fed meeting expectations. Additionally, bond market data indicates a growing number of traders betting on an emergency rate cut, with a 60% probability of a quarter-point reduction coming as soon as next week. Either way, sentiment toward risk-on assets such as stocks and crypto may remain fragile as the market anticipates forthcoming rate cuts and weighs the prospects of a U.S. soft landing and a recession.
Looking Ahead and Closing Thoughts
The large-scale decline in asset prices in both the traditional and crypto markets has been rapid and painful. As we are still in the very early stages of this market rout, continued volatility is to be expected. We will continue monitoring the following:
Stock market performance: Correlation between global stock market indices and the crypto market has increased. Without a recovery in the health of the global financial market, it may be challenging for crypto assets to stage a comeback. Likewise, a stronger stock market bodes well for risk assets like crypto.
Central bank policies: While the next policy meeting for the Federal Reserve is only scheduled for September, look out for traders’ expectations of the extent of rate cuts by the Fed. The probability of a 0.50% cut has risen in recent days (as opposed to 0.25%). There are also some market participants who have voiced speculations of a potential emergency meeting before September.
On-chain movements by whales: Large players have the ability to move the market. Any purchases or sales can have a sizable price impact, and may also be an indicator of their view of the market.
The current market environment is undoubtedly challenging. During such times, keeping up with the latest developments can be helpful for making more informed decisions. For those interested in our medium-term view of the market, do check out our previous report here.
Further Reading
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