Today, the cryptocurrency market is experiencing significant losses, echoing severe selloffs in the global equity market. This downturn has resulted in over $1 billion in liquidations, marking the worst daily performance since the FTX crypto exchange collapse in November 2022.
Yen Carry Trades Impact Global Risk Sentiment
On August 5, the total market capitalization of all cryptocurrencies plummeted by up to 15.80%, reaching a six-month low of $1.694 trillion. Leading the downturn were Bitcoin (BTC) and Ether (ETH), which together command over 70% of the total crypto market share. The declining appeal of yen-dollar carry trades is at the heart of these losses.
In a typical carry trade, investors borrow in a low-interest currency like the yen, convert it into a high-interest currency like the US dollar, and invest the proceeds in stocks, bonds, and other assets. This strategy has been profitable due to Japan’s near-zero interest rate policy compared to the higher rates in the US. However, the Bank of Japan (BOJ) raised its interest rate to 0.25% on July 31, leading to speculation of further increases. Meanwhile, the US Federal Reserve is expected to start cutting interest rates in September due to rising unemployment and slower economic growth.
This interest rate disparity has caused the yen to surge to its strongest levels against the dollar since January 2024. As a result, traders who borrowed yen to invest in riskier assets are now unwinding these positions to avoid higher borrowing costs and repay debt. This has led to a selloff in both stock and crypto markets, further exacerbated by geopolitical tensions in the Middle East and recession risks in the US.
Over $1 Billion in Crypto Liquidations
The crypto market’s decline has accelerated due to $1.08 billion in liquidations within the last 24 hours, with $919.54 million of these being long positions. Concurrently, the open interest (OI) in the crypto futures market has dropped by approximately 15%.
The extensive liquidation of long positions indicates that many traders were excessively bullish and heavily leveraged. When the market moves against these positions, it triggers a cascade of liquidations, intensifying the downward price movement. This creates a rapid decline as stop-losses and margin calls are activated. The reduction in OI suggests that traders are closing their positions and stepping back from the market.
Funding rates for most top cryptocurrencies, including Bitcoin and Solana, have turned negative. This indicates a bearish sentiment among futures traders, who are willing to pay a premium to maintain their short positions. As shorts dominate the market, negative funding rates can further drive prices down.
Descending Triangle Breakdown
The current losses in the crypto market are part of a descending triangle breakdown move. Descending triangles are bearish reversal patterns that appear in uptrends, characterized by a falling trendline resistance and horizontal trendline support. These patterns typically resolve when the price breaks below the support trendline, falling by the maximum distance between the resistance and support trendlines.
As of August 5, the crypto market capitalization has entered the breakdown stage, with further declines potentially targeting $1.596 trillion. This downside target served as support during the December 2023-February 2024 period.
This article does not provide investment advice or recommendations. Every investment and trading decision involves risk, and readers should conduct their own research before making any decisions.
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