Bitcoin (BTC) and Ethereum (ETH), along with the rest of the cryptocurrency market, experienced a sharp downturn over the first week of August, with Ethereum dropping 25% in just one day for its biggest single-day loss ever.
But the cryptocurrency sector wasn’t alone in losing a ton of value, as the Nasdaq, Dow Jones, and S&P 500 have all seen significant dips over the first week of August as well.
The “crash” might not last long as many markets have already posted significant recoveries but let’s get into what caused the sudden drop in price.
Instability In Middle East
The growing political instability that is happening in the middle east as Israel continues its war on Palestine has spilled into other nations, causing global concern over a larger war breaking out between multiple middle eastern nations and Israel. As Iran and Lebanon start to involve themselves further, there may be further catalysts that affect global markets.
The threat of a greater war is a large enough risk for institutional investors to step away from riskier assets such as digital ones, and that is being seen in the vacation of liquidity out of the sector over the first week of August.
Bank of Japan Raises Rates
Perhaps the biggest catalyst in the decline of both the crypto and traditional markets so far in August was on July 31, when the Bank of Japan raised interest rates on short-term government bonds from 0% to 0.25%. This followed a previous hike in March, when the bank raised the rate for the first in 17 years from -0.1% to 0%.
This change in rates caused the value of the Japanese Yen to jump in global markets, which was actually a bad thing for most global investors, who had been taking advantage of the low rate of the Bank of Japan bonds to finance a variety of investments. These are referred to as Yen carry trades.
Suddenly, their loans that were denominated in Yen were much more expensive, and so they had to sell-off assets in order to avoid margin calls and just to be cautious in general.
These sell-offs were felt globally, in both the cryptocurrency sector, US markets, European markets, and of course, Asian markets. However, the Bank of Japan has said they don’t plan on increasing rates again anytime soon, especially in wake of the global volatility that has resulted from this one.
Rebound for Crypto?
Though the dip for the cryptocurrency sector isn’t exactly welcomed, it does set up the sector for a rebound as the summer comes to a close, assuming it can avoid further bloodshed. But, the current technical patterns for Bitcoin seem to indicate that it can avoid further downside, with the Bank of Japan’s comments
Closing Thoughts
The global nature of financial markets is both a great thing and a somewhat terrible thing. Institutional investors look to wherever they can to potentially make more money, and this includes markets on the other side of the world.
Though this can be beneficial for a time, it can certainly create chokepoints for global finance, as evidenced by what has resulted from the Bank of Japan rate increases.
Somewhat ironically, Bitcoin and cryptocurrencies are the solution to these issues, but are often one of the first asset classes to experience a downturn when there is global financial uncertainty.
