The cryptocurrency market is on pace to record its worst daily performance since the FTX crypto exchange collapse in November 2022, mirroring a broader global market downturn.

Yen Carry Trades Impact Global Risk Sentiment

On August 5, the combined market capitalization of all cryptocurrencies fell by up to 15.80%, hitting a six-month low of $1.694 trillion. Bitcoin ($BTC ) and Ether ($ETH ), which together account for over 70% of the total crypto market, led the declines.

The primary factor behind these losses is the diminished appeal of yen-dollar carry trades.

In a typical carry trade, investors borrow funds in a low-interest currency (like the yen), convert them to a high-interest currency (like the US dollar), and use the proceeds to invest in various assets. The profit comes from the difference between the interest rates.

Currency Carry Trade Dynamics

This strategy has been effective due to Japan's near-zero interest rate policy compared to the higher rates in the US.

However, on July 31, the Bank of Japan (BOJ) raised its interest rate to 0.25%, prompting speculation of further increases. Meanwhile, the US Federal Reserve is expected to start reducing interest rates in September due to rising unemployment and slower economic growth.

This shift caused the yen to appreciate to its highest levels against the dollar since January 2024, disrupting the profitability of the yen-dollar carry trade.

Impact on Markets

Traders who had borrowed yen to invest in riskier assets are now closing these positions to avoid higher borrowing costs and repay their debts. This has led to a sell-off in both the stock and crypto markets, exacerbated by geopolitical tensions in the Middle East and recessionary concerns in the US.

Over $1 Billion in Crypto Liquidations

The market downturn has intensified with $1.08 billion in liquidations over the past 24 hours, including $919.54 million in long positions. Additionally, open interest (OI) in the crypto futures market has dropped by about 15% during the same period.

The substantial liquidation of long positions indicates that many traders were overly optimistic and highly leveraged. When the market moves against these positions, it triggers a cascade of liquidations, exacerbating the downward price trend. This often leads to a rapid decline as stop-loss orders and margin calls are triggered.

The decrease in OI suggests that traders are closing their futures contracts and retreating from the market. Funding rates for major cryptocurrencies, including Bitcoin and Solana, have also dipped into negative territory.

Descending Triangle Breakdown

The current crypto market decline is part of a descending triangle breakdown.

Descending triangles are bearish patterns that form during uptrends, marked by a declining trendline resistance and a horizontal trendline support. Typically, these patterns resolve when the price falls below the support trendline, potentially dropping as much as the maximum distance between the resistance and support trendlines.

As of August 5, the crypto market capitalization is in the breakdown phase, with a potential further decline towards $1.596 trillion—a level that acted as support between December 2023 and February 2024.