As a seasoned crypto investor with battle scars from more than a few market crashes, I find myself standing before the latest tumultuous event in the cryptoverse – the sudden plunge of Bitcoin to $49,300, followed by a swift recovery to $56,000. The weekend carnage was a stark reminder of the double-edged sword that is 24/7 trading, an advantage that has now become our Achilles heel.
Following an eventful Monday that lived up to its ominous label, Bitcoin plummeted to approximately $49,300. However, by Tuesday, the digital currency leader bounced back to around $56,000. The question remains: Will this recovery persist, or does it signal the onset of a steep descent into the next bear market?
Crypto 24-hour trading was the achilles heel
24/7 trading is one key benefit that sets cryptocurrency and Bitcoin markets apart from conventional ones. Yet, during weekends, this characteristic can be seen as a weakness for cryptos.
As a seasoned economist with years of experience under my belt, I must admit that the recent decision by the Japanese central bank to raise its interest rate by 25 basis points is noteworthy. While such a move may seem routine for other central banks, it is significant when viewed through the lens of the Japanese economy’s history. Having closely followed the Bank of Japan’s (BoJ) policies since the global financial crisis in 2007, I can confidently say that this is only the second time they have raised rates during that period.
Apart from this increase, it was substantial enough to influence a financial strategy called the “Yen Carry Trade”. Essentially, this involves financial institutions like hedge funds exploiting lower interest rates in countries such as Japan, compared to the U.S., for instance.
As a seasoned investor with over two decades of experience in the financial markets, I have witnessed numerous cycles of market fluctuations and shifts in investment strategies. One strategy that has gained popularity in recent years is the use of leverage to buy assets like U.S. treasuries by borrowing money at artificially low interest rates. This approach allows investors to benefit from the spread between the interest rate they pay on their loans and the yield on the assets they purchase. However, I have learned that market conditions can change suddenly and dramatically, as we are currently seeing with the recent 0.25% increase in Japanese interest rates. This sudden shift has reduced the profitability of the spread, causing turmoil in the market and forcing hedge funds to start liquidating their positions. It is a reminder that the markets are always dynamic and unpredictable, and investors must be nimble and adaptive to navigate these challenges successfully.
Over the weekend, conventional financial assets do not change hands, posing a significant challenge for hedge funds aiming to boost liquidity to exit their carry trades. Consequently, as traditional assets were unavailable, cryptocurrencies emerged as the sole marketable options, leading to the downfall of Bitcoin and similar digital currencies.
US dollar holds support against the JPY
Will the downtrend continue in the cryptocurrency market following the significant 12.5% drop in the USD/JPY pair, which strengthened the Japanese yen and weakened the U.S. dollar? However, this decline seems to have found a temporary halt at approximately 145 JPY.
It’s expected that the carry trade will keep unfolding, however, significant stock markets have resumed trading on Monday. The day witnessed a massive sell-off worth over $6 trillion in conventional assets worldwide.
It was said that the Federal Reserve might convene an emergency session to immediately increase interest rates. Yet, such a move seems uncertain, considering it could be perceived by the market as a sign of desperation on the Fed’s part.
A considerable bounce from $BTC
Regarding Bitcoin ($BTC), you can observe on the weekly chart provided that its price has significantly rebounded from the low of approximately $49,300. The robust support offered by both the current and previous bull markets creates a range between $52,000 and $51,000, signifying potential stability for the cryptocurrency at these levels.
If the Bitcoin (BTC) price manages to stay above $55,600 by the end of the week, there’s a possibility that its recovery might persist from that level. Conversely, if the $51,000 support doesn’t hold and the price plummets beneath it, the next significant support could be found at around $43,000 to $41,000. Dropping below this range would bring us to the bull market trendline, which could serve as a crucial barrier in this scenario.
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2024-08-06 13:13