Market Turmoil on August 5th
On August 5th, financial markets faced widespread asset sell-offs, including stocks and precious metals. The VIX volatility index, also known as the fear gauge, surged to its highest level since the COVID-19 pandemic.
Causes Behind the Market Drop
Two main factors triggered this market downturn. First, Japan raised its key interest rate to 0.25% for the first time since 2006. This increase made carry-trade deals less attractive. Before, investors borrowed yen at near-zero rates, exchanged yen for U.S. dollars, and bought American stocks and bonds. The rate hike led to more expensive loans and a stronger yen, prompting carry-trade enthusiasts to liquidate positions.
Second, a decline in the tech sector’s returns and disappointing July economic data from the U.S. led to risk reassessments. The recession indicator, developed by Federal Reserve economist Claudia Sahm, surpassed the critical 0.5% threshold. Historically, this indicator has accurately predicted economic downturns.
Cryptocurrency Market Resilience
Despite the risk aversion and falling financial assets, the fundamentals for cryptocurrencies remain strong. Positive factors include global recognition, the emergence of new exchange-traded products in the U.S., the implementation of MiCA in the EU, and the growing number of companies with crypto reserves.
Bitcoin and Ethereum Outlook
The future performance of Bitcoin and Ethereum largely depends on investors’ resilience to panic. American spot ETFs, a key driver for 2024, saw a combined outflow of $406 million in the past two days. But this is far from the May 1st record of $564 million.
Ethereum, however, reacted worse to recent events than Bitcoin. As before warned, the altcoin continues to underperform. This is primarily due to the heavy influence of Grayscale and a consistent negative net inflow since the ETF launch.
Ethereum’s More Challenges
Furthermore, Ethereum faced pressure from significant coin sell-offs by major market makers. In one day, Wintermute sold 47,000 ETH, and Jump Trading sold 36,000 ETH, totaling $250 million. The value locked in DeFi plummeted by 2.4 million ETH or $6 billion in a single day.
Despite this, Ethereum ETF investors saw the 48% drop from the March peak as an opportunity to increase their positions. On Monday, net inflows amounted to $48.8 million.
