The cryptocurrency market is on track to exhibit its worst daily performance since the bankruptcy of the FTX crypto exchange in November 2022, reflecting a global market collapse. On August 5, the total market value of all crypto assets fell by up to 15.80%, dropping to a six-month low of $1.694 trillion. Leading the losses were Bitcoin and Ethereum, which control over 70% of the total crypto market share.
Why Are Markets Falling?
At the heart of these declines is the decreasing appeal of yen-dollar carry trades. In a typical carry trade, investors borrow in a low-interest currency (like the yen), exchange it for a higher-interest currency (like the US dollar), and use the proceeds to buy other assets such as stocks and bonds. In an ideal environment, investors profit from the interest rate differential.
This strategy yielded positive results for investors due to Japan’s near-zero interest rate policy compared to the higher rates in the US. However, on July 31, the Bank of Japan (BOJ) raised the interest rate to 0.25%, leading to speculation among investors about further increases. In contrast, the US Federal Reserve is likely to start lowering interest rates in September due to rising unemployment and slower economic growth. As a result, the yen reached its best levels against the dollar since January 2024. This rapid appreciation disrupted the profitability of yen-to-dollar carry trades.
Simply put, investors who borrowed yen to invest in riskier assets are now closing these positions to avoid higher borrowing costs and repay their debts. Consequently, geopolitical tensions in the Middle East and recession risks in the US have increased selling pressure, leading to a collapse in stock and crypto markets.
Current State of the Crypto Market
The decline in the crypto market gained momentum due to $1.08 billion in liquidations in the last 24 hours, with $919.54 million of that in long positions. Meanwhile, the open interest (OI) in the crypto futures market fell by approximately 15% during the same period.
The significant liquidation of long positions indicates that many investors were overly bullish and highly leveraged. When the market moves against these positions, a series of liquidations are triggered, intensifying the downward price movement. This scenario typically leads to a rapid decline when stop-loss and margin calls are hit.
Meanwhile, the decrease in OI indicates a reduction in the number of active futures contracts, showing that investors are closing their positions and exiting the market. Funding rates for most top cryptocurrencies, including Bitcoin and Solana, simultaneously fell into negative territory.
This indicates a bearish sentiment among futures investors, as they are willing to pay a premium to maintain short positions. As short positions dominate the market, negative funding rates can lead to further downward pressure on prices.
