Cryptocurrency Crash: Bitcoin, Ethereum, and Crypto Prices Plummet – What Happened? #stocks $BTC $DOGE $ETH $IBIT
The cryptocurrency market experienced a significant downturn starting at 8 p.m. ET on Sunday, with no signs of recovery as of 11:30 a.m. ET on Monday. Bitcoin (BTC) saw an 8.3% decline in the last 24 hours, Ethereum (ETH) dropped by 14.7%, and Dogecoin (DOGE) fell by 9.1%. Notably, the two leading crypto exchange-traded funds (ETFs), iShares Bitcoin Trust and Grayscale Ethereum Trust, also recorded losses of 12.6% and 19.2%, respectively, compared to their closing prices on Friday.
The trigger for this rapid sell-off was attributed to leverage, specifically the yen carry trade, which ignited market turmoil. The yen carry trade involves borrowing yen at historically low interest rates and converting it to a higher-yield currency like the U.S. dollar to invest in more profitable assets, creating an interest rate arbitrage scenario.
Recent developments have seen challenges in the yen carry trade due to an increase in yen debt yields and a rise in the yen’s value relative to the U.S. dollar, leading to increased conversion costs. The Bank of Japan’s decision to raise interest rates from 0% to 0.1% to 0.25% exacerbated the situation, causing a surge in the yen and a corresponding drop in the U.S. dollar to yen conversion rate.
The unwinding of the yen carry trade involves selling acquired assets and converting funds back to yen, potentially driving down asset values and worsening the situation. Leverage has accelerated and exacerbated these market movements, particularly impacting the crypto market, which operates 24/7 and carries significant leverage.
In the past 24 hours, crypto markets witnessed $1.22 billion in liquidations, with $955 million stemming from long positions. The liquidation process can create a self-reinforcing loop, where market declines trigger further liquidations, leading to more declines.
While the downward trend in the crypto market seems to have paused momentarily, the risk remains high, especially if other leveraged trades face pressure, potentially reigniting the downward spiral. Cryptocurrencies were once perceived as a hedge against traditional currencies and markets; however, recent events have shown that they exhibit correlated behavior with growth stocks.
The decline in the crypto market during a period of stock market volatility raises concerns, as cryptocurrencies may not provide the expected hedge in turbulent economic times. Given the high levels of leverage in the crypto market, investors are advised to exercise caution and remain vigilant in their trading decisions.
