Author: Matt Hougan, Chief Investment Officer of Bitwise; Translated by: 0xjs@Golden Finance
The cryptocurrency market has seen a sharp sell-off this week. From 4 p.m. ET on Friday to 7 a.m. Monday, Bitcoin fell nearly 20%, from $63,356 to $51,026. Ethereum performed even worse, falling from $3,307 to $2,234, a drop of more than 30%.
Of course, cryptocurrencies aren’t the only ones.
Global capital markets are turbulent due to growing economic concerns and geopolitical worries. In Japan, the Nikkei just experienced its worst day since 1987, falling more than 12%. In the United States, Nasdaq futures fell more than 4%, and the VIX volatility index has risen 100% since last Friday.
If you’re like most cryptocurrency investors, you experience wild swings in emotion, including fear or despair. For many, the most shocking emotions are those like anger.
I thought cryptocurrencies were supposed to be a hedge against global uncertainty!? What’s going on?
I feel the same way.
But there’s one thing I feel more deeply, based on my six-plus years of experience managing cryptocurrency funds full-time: opportunity.
Lessons from the COVID-19 sell-off
The last time the market crashed like this was on March 12, 2020. That was the day the world realized that the coronavirus pandemic was a big deal.
Just in case you forgot, let me remind you: it was chaos.
On March 12, the Dow Jones Industrial Average dropped 2,353 points, its biggest one-day drop since 1987. Tech stocks and commodities fell sharply. We all thought the global economy was coming to an end. The next morning, the president declared a national emergency.
Bitcoin saw the biggest drop of all assets, falling 37% from $7,911 to $4,971. It was a dramatic one-day move that wiped out a year’s worth of gains in 24 hours.
It feels like we may never recover. The media claims Bitcoin has failed as a hedge asset.
Then something remarkable happened. As world leaders took steps to stabilize their economies — lowering interest rates, printing money — Bitcoin began to rise. A year later, Bitcoin was trading at $57,332, up more than 1,000%.
In retrospect, March 12, 2020 was not a day to panic. It was the best time to buy Bitcoin in a decade.
In hindsight, it’s easy to see why. Bitcoin didn’t fundamentally change because of the coronavirus pandemic. The maximum number of Bitcoins (21 million) was the same on March 11th as it was on March 12th. You didn’t need to rely on any bank, government, or company to store your wealth in Bitcoin on March 11th, and the same is true on March 12th.
At the same time, the coronavirus pandemic has given Bitcoin more reasons to rise in the long term. It has shown that central banks will step in to save the economy at the first sign of trouble. It has demonstrated the limitations of centralized institutions. And it has reminded us that the future will be more online and digital.
These changes suggest that Bitcoin will become more important, not less important. And in the long run, that’s exactly what’s happening.
I saw the same thing today.
What caused the market crash?
I don’t want to spend too much time reviewing what led to the current market pullback.
But in short: Weak U.S. economic data on Friday stoked fears of a global slowdown. That sparked panic in Asia, where a rapid unwinding of yen carry trades (a strategy designed to exploit interest rate differentials between currencies) sent Japanese stocks tumbling. Heightened concerns about geopolitical risks in the Middle East, with Iran threatening to attack Israel, didn't help.
These events collided with peculiarly negative developments in the cryptocurrency market, with a large market maker (Jump Trading) getting into trouble and facing forced liquidations of large positions in ETH.
All of this happened on a summer weekend when liquidity was low, further exacerbating the move.
But watch what happens next: It looks like we’re about to see a repeat of the Covid script.
The federal funds futures market has already priced in an aggressive response. A week ago, when Fed Chairman Jerome Powell was downplaying the need for rate cuts this year, the market saw only an 11% chance of a 50 basis point rate cut at the Fed’s September meeting. Now, the market has raised that probability to 98%. Some are even calling for an “emergency rate cut” before the September meeting.
Probability of target rate for the Fed meeting on September 18, 2024
Source: CME Fedwatch. Data as of August 5, 2024.
So are the printing presses really coming? If history is any guide, the answer is yes. It happened during the coronavirus pandemic. It happened after the European debt crisis in 2010. It happened in 2008. And it could happen again if the events of this weekend lead to real economic turmoil.
What to watch for in the future
In the short term, the key question is whether the crypto market has bottomed. A sharp correction in the crypto market could feed back on itself, creating a downward cycle that would need to exhaust itself before bottoming out. This is because, as prices fall, leveraged traders face margin calls and are forced to sell. We have already seen over $1 billion in futures liquidations, and it is unclear if we have bottomed out. You can watch here to see if forced liquidations slow down.
It’s also worth keeping an eye on the health of companies in the crypto ecosystem. As we saw in the 2021 crisis, very sharp volatility can knock out companies with overleveraged balance sheets. As I mentioned, there are already rumors of challenges facing at least one market maker (Jump Trading), which could extend the downtrend if contagion occurs.
I will also be watching ETF flows to see if ETF investors take advantage of this pullback to sell or buy more. These three factors will largely determine where we go in the near term.
But my real advice is to ignore the short-term and look beyond. Bitcoin is a volatile asset that can go up and down in a big way. It has always been this way, and it will continue to be this way for some time. Times like these once again prove the futility of trying to time short-term trades.
Bringing a trading desk mentality into crypto is a mistake. You are investing in a once-in-a-generation change in how global money works. Resist the urge to focus on intraday prices and instead focus on where Bitcoin could be next year, five years, and ten years from now.
When you get your first job on Wall Street, they will tell you that the four most expensive words in finance are “this time is different.”
Historically, whenever we've seen this kind of global economic panic, cryptocurrencies have initially fallen but then risen over the following year. Maybe this time it's really different, but I wouldn't bet on it. In fact, I'd bet in the opposite direction.
