On August 5, the cryptocurrency market's losses reflect a severe sell-off that has already led to over $1 billion in withdrawals.
Yen-based carry trades are impacting global market sentiment negatively.
On Aug. 5, the combined value of all crypto assets fell by as much as 15.80% to its lowest point in six months, hitting $1.694 trillion. Bitcoin was the biggest loser.
which together hold more than 70% of the crypto market's share.
The main reason for these drops is the diminishing attractiveness of yen-dollar carry trades.
In a typical carry trade, investors borrow in a currency with low interest rates (like the yen) and exchange them for a currency with high interest rates (like the US dollar), using the money to invest in stocks, bonds, and other assets. The ideal situation is when the difference in interest rates leads to profit.
This approach has been successful for investors because of Japan's near-zero interest rate policy compared to the US's higher rates.
However, on July 31, the Bank of Japan (BOJ) raised its interest rate to 0.25%, sparking fears of more increases among traders. On the other hand, the US Federal Reserve is expected to begin reducing interest rates in September due to increasing unemployment and slower economic growth.
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The crypto market has seen a surge in losses, with over $1 billion in withdrawals in the last 24 hours, with $919.54 million coming from long positions. At the same time, the crypto futures market's open interest (OI) has fallen by about 15%.
The large sell-offs in long positions indicate that many traders were overly optimistic and heavily leveraged.
When the market turns against these positions, it triggers a domino effect of sell-offs, making the decline worse as stop-losses and margin calls are triggered.
Meanwhile, the drop in OI suggests fewer active futures contracts, showing that traders are winding down their positions and moving away from the market. The funding rates of many top cryptocurrencies, including Bitcoin and Solana, have also gone negative at the same time.
As of Aug. 5, the crypto market has entered a breakdown phase, with expectations of further declines to $1.596 trillion. This lower target has acted as support during the December 2023-February 2024 period.