As global financial markets become increasingly interconnected, the relationship between traditional stock markets and emerging cryptocurrency markets has attracted widespread attention from investors and analysts. This article will analyze the recent "8.5 Cryptocurrency Crash" incident and the relationship between the Japanese economy and the global cryptocurrency market to reveal the driving factors behind these complex market dynamics.
1. Analysis of the "8.5 Currency Disaster" incident
1.1 Overview of the incident
On August 5, 2024, the global financial market suffered a "Black Monday". Asia-Pacific stock markets were the first to be hit: the Nikkei 225 index plummeted 12.4%, falling below the 32,000 point mark, setting a new low since November 2, 2023; South Korea's KOSPI index fell 8%, triggering the circuit breaker mechanism, and trading was forced to suspend for 20 minutes.
Image source: TradingView
As a financial sector that operates 24/7, the cryptocurrency market is certainly not immune to the crisis. Bitcoin plummeted from a high of $59,000 to $48,000, a single-day drop of 18.6%. Ethereum's performance was even worse, plummeting from around $2,700 to $2,070, a staggering intraday drop of 22.2%. Other altcoins encountered even more severe selling pressure, with most currencies falling between 20% and 50%, and the market was bleak.
Image source: TradingView
1.2 Triggering factors
The direct trigger of this plunge was the weak economic data released by the United States. In July, the number of new non-farm employment in the United States was only 114,000, far below the expected 175,000, and the previous value was revised down from 206,000 to 179,000. At the same time, the unemployment rate rose to 4.3%, higher than the expected and previous value of 4.1%. According to the "Sahm Rule", when the 3-month moving average unemployment rate rises by 0.50 percentage points or more from the lowest point in the past 12 months, it is usually regarded as a signal of economic recession. After the release of this data, it means that the indicator has been triggered, and these data have triggered market concerns about economic recession.
In addition, rising geopolitical risks, continued inflationary pressure and uncertainty in monetary policies of global central banks are also important factors that contributed to this plunge.
1.3 Market Response
The market's reaction to this wave of decline was swift and violent. First, a large number of investors panicked and sold, choosing to cut their positions and stop losses, resulting in a snowball effect of selling pressure. To make matters worse, the well-known market maker Jumptrading sold on a large scale on the same day. Although part of the reason was related to its compensation obligations, the choice to flee at a high level also reflected its judgment on the market outlook. Third, a large number of leveraged positions were forced to close, further exacerbating the price decline.
Of course, there are also contrarian investors. According to the monitoring of the on-chain analyst Ember, a new address suspected to belong to Justin Sun used 37 million USDT to buy 16,236 ETH in the past 3 hours, with an average price of 2,279 US dollars.
1.4 Short-term and long-term impacts
Short-term impact:
Investor confidence hit: The plunge has dealt a severe blow to market sentiment and may lead to shrinking trading volumes in the short term.
Regulatory concern: Such drastic market fluctuations may attract more attention from the SEC and may accelerate the introduction of relevant policies in the short term.
Long-term effects:
Market purification: The plunge has cleared a large number of leveraged positions, which is conducive to the long-term healthy development of the market.
Valuation reset: Provides more attractive entry prices for some high-quality projects, which may attract more long-term investors.
Increased awareness of risk management: This incident will prompt investors and project parties to pay more attention to risk management.
2. The correlation between the Japanese economy and the global cryptocurrency market
2.1 The impact of Japan’s economy on the global cryptocurrency market
As a major global economy, Japan’s economic policies and market trends have a significant impact on global financial markets, including the cryptocurrency market. The following aspects are particularly critical:
l Impact of low interest rate environment:
Japan has long implemented a low-interest rate or even negative interest rate policy, creating a unique investment environment for global investors. This low-cost borrowing environment encourages "carry trades", where investors borrow low-interest yen to invest in high-yield assets, including cryptocurrencies. The low interest rate policy also promotes global liquidity expansion, indirectly increasing the demand for high-risk assets (such as cryptocurrencies).
Image credit: Macromicro
l Spillover effects of monetary policy:
The Bank of Japan's monetary easing policy has a significant impact on global liquidity. When central banks release liquidity, some funds may flow into the cryptocurrency market, driving prices up. On the contrary, if the BOJ tightens its policy, it may cause global liquidity to shrink and put pressure on cryptocurrency prices.
Japan’s role as a pioneer in cryptocurrency regulation:
Japan is one of the first countries in the world to establish a clear legal framework for cryptocurrency transactions. Japan's regulatory policies are often used as a reference by other countries, so its policy changes may affect the global cryptocurrency regulatory trends.
2.2 Correlation between Nikkei Index volatility and Bitcoin and mainstream tokens
Although the Japanese economy has a certain impact on the global cryptocurrency market, the direct correlation between the Nikkei Index and Bitcoin and other mainstream cryptocurrencies is not significant.
Based on historical data analysis, looking back at the past several rounds of cryptocurrency bull markets, there is no significant correlation between the Nikkei Index and the price trends of major cryptocurrencies. Statistical analysis shows that the price correlation coefficient between the Nikkei Index and Bitcoin is usually lower than 0.3, indicating that the correlation between the two is weak. Moreover, the Nikkei Index mainly reflects the operating conditions of large Japanese companies and investors' confidence in the Japanese economy. The cryptocurrency market is more affected by global technological innovation, regulatory policies and speculative sentiment.
In addition, as a mature market index, the Nikkei Index usually has a daily volatility range of 1-2%, and the main participants of the Nikkei Index are institutional investors and long-term value investors. The daily volatility of mainstream cryptocurrencies may reach 10% or even higher, reflecting the high-risk nature of the market and more diversified participants, including a large number of individual investors and venture capital.
In some cases, the Nikkei and cryptocurrencies may experience large fluctuations at the same time, but this is usually caused by common macroeconomic factors or global risk events rather than a direct correlation between the two. For example, the 805 incident was caused by a global economic recession, a major geopolitical event, or a global liquidity crisis that could affect both markets at the same time.
In general, although Japan's economic and policy changes have a certain impact on the global cryptocurrency market, the Nikkei Index has a weak direct correlation with Bitcoin and mainstream tokens.
3. The impact of the U.S. stock market on the cryptocurrency industry
3.1 The role of US stocks as a barometer of global finance
As the world's largest and most mature stock market, U.S. stocks can be said to play the role of a "barometer" in the global financial system, and their performance largely affects the sentiment and decision-making of global investors.
Over the past decade, according to data from the Investment Strategy Group, the growth rate of earnings per share (EPS) of US stocks has been significantly faster than that of non-US stocks. Since the peak before the financial crisis in 2007, US stock EPS has increased by more than 100%, while the rest of the world has only increased by 22% during the same period, and the eurozone has only increased by 4%.
Image source: Investment Strategy Group
Of course, U.S. stocks won’t outperform other markets forever, but given that the dollar could appreciate by 2%, the actual returns could be comparable. And its status as a safe-haven asset compared to other currencies could benefit from elevated geopolitical risks even in the face of domestic political tensions and divisions.
In general, U.S. stocks have their unique advantages, such as sustained profit growth, leading position in technological innovation, and the characteristics of safe-haven assets, making them the focus of global investors. When U.S. stocks perform strongly, they tend to drive global market sentiment higher to a large extent; conversely, the decline of U.S. stocks may also trigger a chain reaction in the global market.
3.2 Correlation between major stock indices (such as Dow Jones, Nasdaq, S&P 500) and the cryptocurrency market
The correlation between major stock indices such as the Dow, Nasdaq and S&P 500 and the cryptocurrency market has gained increasing attention in recent years, with the relationship suggesting that investors are treating cryptocurrencies, especially Bitcoin, more like traditional stocks.
From a market reaction perspective, both stock indices and cryptocurrencies tend to react similarly to macroeconomic events and market influencers. For example, important Fed announcements on interest rates can cause price volatility in both stocks and cryptocurrencies. For example, on May 4, 2022, the Fed announced that it would increase its target federal funds range to 0.75% – 1%. On May 5, 2022, Bitcoin fell to around $31, 000. The Nasdaq 100 (NDX) fell by about 1, 400 points, and the SPX fell by about 150 points. The volatility in cryptocurrency prices is much more pronounced, but the effect is the same.
From a volatility perspective: Cryptocurrencies are generally more volatile than traditional stocks, but their price movements generally track those of major stock indices. This increased volatility can be attributed to the speculative nature of cryptocurrencies, where investor sentiment can cause prices to fluctuate widely based on market conditions and news events.
Investment Behavior: As cryptocurrencies grow in popularity, many investors are beginning to view them as an alternative asset class. This shift has led to greater correlation between the performance of cryptocurrencies and stock indices, especially during times of economic uncertainty or market stress. Investors may shift assets between stocks and cryptocurrencies based on perceived risks and opportunities.
3.3 The special relationship between technology stocks and cryptocurrencies
Both technology stocks and cryptocurrencies represent innovation and growth potential. When investors are attracted to technology companies, they are looking for investment opportunities that can disrupt traditional industries and bring high returns. Similarly, cryptocurrencies are seen as the new frontier in finance and technology, which will also attract these investors seeking speculative returns. This common narrative can lead to correlated price movements, especially when technological advances or regulatory changes affect both industries.
Additionally, the performance of technology stocks can significantly impact the cryptocurrency market. For example, during periods of strong performance in the technology sector, investor confidence may spread to cryptocurrencies, pushing prices higher. The technology sector has been a major driver of the overall stock market, and its performance can set the tone for broader market trends. As cryptocurrencies are increasingly treated like stocks, especially by institutional investors, their prices are starting to reflect the same market dynamics affecting technology stocks. This includes reactions to economic indicators and the biggest narrative of the year - changes in interest rates.
Finally, many tech companies are exploring or integrating blockchain technology, which is the basis of cryptocurrencies. This connection can enhance the appeal of both tech stocks and cryptocurrencies, as advances in blockchain can lead to new applications and investment opportunities. As tech companies adopt or invest in cryptocurrencies, their stock performance may become increasingly tied to the success of digital assets in real-world applications.
4. Investment strategy and risk management
Based on an in-depth analysis of the relationship between the Nikkei, US stocks, and cryptocurrency markets, it can be seen that investors should try not to concentrate all their funds in a single market. Moderately diversify between traditional stocks, cryptocurrencies, and other asset classes to reduce overall portfolio risk. Not only pay attention to price trends, but also monitor macroeconomic indicators, policy changes, and geopolitical events to fully assess potential risks and opportunities. Closely monitor changes in the correlation between major global stock indices and cryptocurrency markets. In periods of increased correlation, more caution is needed to avoid overexposure to systemic risks. The investment market is a marathon, not a sprint. It is more important to walk far than to run fast in this financial market.
