The crypto market is known for its wild swings, but this week was a whole new level of crazy. Bitcoin, Ethereum, and Solana took some of their hardest hits since the summer of 2022. But this time, it wasn’t just crypto’s own doing.
A perfect storm of fears over tech earnings, a possible U.S. recession, and the unwinding of leveraged trades sent shockwaves through global markets. Stocks, bonds, and currencies got hit, and crypto was dragged along for the ride.
July was shaping up to be a good month for crypto. Mt Gox and Genesis creditors were finally getting the news they’d been waiting for, and there was a buzz about a potential “Trump trade.”
The idea was that a Donald Trump presidency might bring better days for digital assets. Bitcoin perpetual futures were booming, with interest climbing to over $11 billion, close to an all-time high.
The bubble was ready to burst
But as the market heated up, some cracks were starting to show. Despite retail investors staying hyped, momentum traders like commodity trading advisors had been quietly pulling back.
JPMorgan pointed out that these traders had been cashing out of their long positions and even started betting against the market. It was a sign that trouble might be brewing.
Bitcoin was riding high, hitting $70,000 after Trump’s speech at a Bitcoin conference a couple of weeks ago. Funding rates, which reflect the overall market sentiment, were still positive.
Everyone was betting that Bitcoin was going to keep climbing. But behind the scenes, the dynamics of the rally were changing. The big players were getting nervous and starting to hedge their bets.
When the market finally turned, it was a mad dash for the exit. Traders scrambled to sell off their holdings as fast as possible, flooding centralized exchanges with activity.
CCData reported that it was the second-busiest day for spot trading since China’s Bitcoin mining ban back in May 2021. Also, Coinglass data showed that over $1 billion worth of positions were liquidated in just 24 hours, the most since early March.
The chaos in crypto trading
But here’s where things get interesting. Once the liquidations started to slow down, the sentiment flipped on a dime.
FalconX, a crypto broker, said that almost all of its clients, including prop desks, hedge funds, venture funds, and retail aggregators, jumped in to buy the dip.
Binance saw a net inflow of $1.2 billion the day after the selling frenzy calmed down, as traders moved their funds back onto the exchange.
Unlike traditional financial markets, where there are products like short futures ETFs to help dampen volatility, crypto markets are a different beast.
Automated liquidations can make things even worse, turning a bad situation into a full-blown meltdown. But for some traders, one person’s loss is another’s gain.
As the rate of liquidations slowed, it became a signal for others to step in and start buying again.
Despite the chaos, spot Bitcoin ETFs in the U.S. have been changing the game when it comes to daily trading volumes. But while these ETFs have increased activity, they haven’t done much to calm the market’s wild swings.
The real action kicked off when the U.S. stock market opened on Monday, leading to the largest net outflows from spot Bitcoin ETFs since they launched.
Tech stocks took a beating as they missed sky-high earnings expectations, and the yen carry trade began to unravel. Crypto was pulled down along with everything else.
If Bitcoin’s price is tied to what’s happening in other asset classes, then what happens elsewhere in the market matters. The Vix volatility index, often seen as a measure of market fear, has been pretty calm all year.
But after hitting its highest level since the early days of the COVID-19 pandemic on Monday, the Vix hasn’t returned to its usual levels. Some Bitcoin investors might be getting too comfortable, thinking that the worst is behind them.
