The cryptocurrency market is on track to deliver its worst daily performance since the collapse of the FTX crypto exchange in November 2022, mirroring a global market rout.
Yen carry trades hurt global risk sentiment
On Aug. 5, the market capitalization of all crypto assets combined plunged by up to 15.80% to its six-month low of $1.694 trillion. Leading the losses were Bitcoin (BTC) and Ether (ETH), which together control over 70% of the overall crypto market share.
At the core of these declines is the reducing appeal of the yen-dollar carry trades.
In a typical carry trade, traders borrow funds in a low-interest currency (like the yen), exchange them for a high-interest currency (like the US dollar), and use the proceeds to buy stocks and bonds, among other assets. In an ideal setting, investors profit from the difference in interest rates.
This strategy has yielded positive results for investors because of Japan’s near-zero rate policy compared to the US’s higher rates.
However, on July 31, the Bank of Japan (BOJ) increased its interest rate to 0.25%, raising speculation of further hikes among traders. In contrast, the US Federal Reserve will likely start cutting interest rates in September due to rising unemployment and slower economic growth.
As a result, the yen surged to its best levels versus the dollar since January 2024. This rapid appreciation has disrupted the profitability of the carry trade from the yen to the dollar.
Simply put, traders who borrowed yen to invest in riskier assets are now closing these positions to avoid higher borrowing costs and repay debts. The result is a rout in the stock and crypto markets, with geopolitical tensions in the Middle East and recessionary risks in the US also adding to the sell pressure.
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Over $1 billion in crypto liquidations
The crypto market decline has picked up momentum further due to $1.08 billion of liquidations in the last 24 hours, of which $919.54 million are longs. Meanwhile, the crypto futures market’s open interest (OI) has dropped by approximately 15% in the same period.
The significant liquidation of long positions suggests that many traders were overly bullish and heavily leveraged.
When the market moves against these positions, it triggers a cascade of liquidations, exacerbating the downward price movement. This scenario often leads to a rapid decline as stop-losses and margin calls are hit.
Meanwhile, the OI reduction signals a decrease in the number of active futures contracts, indicating that traders are closing their positions and stepping back from the market. Funding rates of most top coins, including Bitcoin and Solana, have dipped into negative territory simultaneously.
This suggests a bearish sentiment among futures traders, as they are willing to pay a premium to maintain their short positions. As shorts dominate the market, negative funding rates can lead to further downward pressure on prices.
Descending triangle breakdown
The crypto market’s losses today are part of a descending triangle breakdown move.
Descending triangles are considered bearish reversal patterns when appearing in uptrends, characterized by their falling trendline resistance and horizontal trendline support. They typically resolve when the price breaks below the support trendline and falls by as much as the maximum distance between the resistance and the support trendlines.
As of Aug. 5, the crypto market capitalization had entered the breakdown stage while eyeing further declines toward $1.596 trillion. This downside target served as support during the December 2023-February 2024 session.
Related: How low can the Bitcoin price go?
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.