Black daylast August 5th, the cryptocurrency market that It lost 17% of its value in 24 hours, with Ethereum recording its worst trading day since 2021. But what caused this sudden and abrupt collapse? As is often the case, there is no single cause, but a concatenation of factors that occurred simultaneously, both inside and outside the crypto universe, he explains. Adrian Fritz, Head of Research at 21Shares.
Crypto, Three Possible Scenarios After the Crash
Among the exogenous factors that have caused an increase in volatility on all markets, the first – explains Fritz – “that we must mention is the increase in interest rates of 25 basis points by the Bank of Japan. With this increase, the highest since 2007, which came immediately after the end of an eight-year period of negative real rates, there was a clear feeling among investors that the village may andenter into recession and, at the same time, they have had to considerably review their strategies carry trading, reallocating assets”. At the same time, on the other side of the Pacific “the data on US unemployment were released, which stood at 4.3%, disappointing expectations (the expected rate was 4.1%); with non-farm income at 114 thousand dollars against the expected 175 thousand. This series of events has therefore caused panic in the markets and made investors run for cover. It is no coincidence that, while the major US indices were recording losses (Dow -1.51%, S&P -1.84%, Nasdaq -2.43%), there was a particularly aggressive purchase of bonds, considered by all to be a less valuable asset class. risky”.
Coming to the crypto universe, “this has also been damaged by the recent developments in the conflict in the Middle East. It is not unusual for stores of value to react negatively to this type of event; in fact, gold lost 3% on August 5th. Furthermore, if we look at the monthly correlation between BTC and ETH with the S&P 500, we see that this is 0.28 and 0.43 respectively, which confirms not only that there has been a negative spillover effect from traditional finance to the crypto world, but also that the correlation between these two sectors has increased, probably also due to the greater accessibility to digital assets following the approval of the ETF. Finally, ETH is was also hit by the $274 million sales by a major market player like Jump Trading, which removed many assets in stakeg between July 25th and today, presumably to purchase stablecoins.”
If we analyze what happened on the markets the day after the crash, “it seems that what we saw was actually a moment of panic, the losses of which were immediately largely smoothed out: the Nikkei 225 recorded more than 10%, the overall market cap of the crypto sector grew by 8.8% and the Nasdaq 100 also achieved a reassuring +1.5%. However, what happened should help us remember that similar events can occur and upset certainties that we thought were solid and digital assets are not immune to certain dynamics. For this reason, we at 21Shares have developed three scenariosfor the next few days, to define what the sector’s rebound could be”.
Let’s suppose that the inflation data to be released on August 14 are better than expected. This and the turbulence of these days could push the Fed to cut interest rates by 0.5% or even 0.5%. 0.75% next September 18th (likely to happen, 75.5% according to CME Fed Watch Tool). Furthermore, let’s also assume that at the presidential debate on September 10, Donald Trump makes his pro-crypto positions heard against a Kamala Harris that has not yet taken sides. In this case, historical precedents tell us that the short-term rebound could be between 10% and 40% and also that investors will be willing to hold cryptocurrencies in their wallets for periods of time potentially longer.
Let’s suppose instead that the geopolitical situation in the Middle East worsen further and that US inflation is still too high. This would destroy hopes for a rate cut by the Fed in 2024 and the willingness to purchase assets risky would be significantly compromised. Furthermore, a further obstacle to inflows into digital assets would be the higher cost of debt, which would further undermine the chances of an economic recovery. If this were to occur, then we could see further waves of sell-offs, with further losses in aggregate value up to 10%-15%.
If on September 18th the Fed tgarlic i interest rates of 25-50 basis points (probability of this happening, 24.5% according to the CME Fed Watch Tool) and then not make any further ones in the short term, then we could see cryptocurrencies being held in portfolios for potentially longer periods of time, but with a more modest short-term rebound, between 5% and 10%.
