Cryptocurrency Crash: Bitcoin, Ethereum, and Crypto Prices Plummet
The cryptocurrency market experienced a significant downturn starting at about 8 p.m. ET on Sunday and has yet to recover as of 11:30 a.m. ET on Monday. During the last 24 hours, Bitcoin (CRYPTO: BTC) has dropped by 8.3%, Ethereum (CRYPTO: ETH) by 14.7%, and Dogecoin (CRYPTO: DOGE) by 9.1%. The leading crypto exchange-traded funds (ETFs) have also seen declines, with the iShares Bitcoin Trust down 12.6% and the Grayscale Ethereum Trust down 19.2% compared to their Friday closing prices.
The sharp sell-off was primarily driven by leverage. This time, it wasn’t just leverage within the crypto market but also the yen carry trade that triggered the market turmoil.
The yen carry trade, a popular strategy, involves borrowing yen, which has maintained a near-zero interest rate since before the 2008 financial crisis, and converting it into a higher-yield currency like the U.S. dollar to invest in higher-yield assets.
Recent developments have seen the yen carry trade unwinding due to a rise in the yield on yen debt and an increase in the yen’s value following the Bank of Japan’s decision to raise interest rates from 0% to 0.25%.
The surge in the yen’s value has led to challenges in converting money back to yen, resulting in losses for investors. Unwinding the trade involves selling acquired assets and converting funds back to yen, potentially driving down asset values and worsening the situation.
The crypto market was particularly impacted due to its 24/7 trading nature and significant leverage. In the past 24 hours alone, liquidations on crypto markets amounted to $1.22 billion, with $955 million coming from long positions.
Leveraged liquidations can create a self-reinforcing cycle in the market, where declines trigger more liquidations, leading to further declines. While the downward trend seems to have paused momentarily, the market remains vulnerable to renewed pressure on leveraged trades.
Contrary to previous beliefs that cryptocurrencies served as a hedge against traditional markets, they have exhibited a correlated behavior with growth stocks. This correlation has resulted in significant crypto declines during stock market downturns, raising concerns among investors.
Given the high level of leverage in the crypto market, caution is advised for potential investors. Leverage exacerbates market movements and can amplify losses, making it essential for investors to approach the crypto market with care.
Before considering investing in Bitcoin, it is crucial to assess the current market conditions and potential risks associated with leveraging. The Motley Fool Stock Advisor team recently highlighted the top 10 stocks for investors to consider, none of which included Bitcoin. These recommended stocks have the potential to deliver substantial returns in the future based on historical performance.
Overall, the recent market turbulence underscores the importance of understanding leverage and its impact on asset values, particularly in volatile markets like cryptocurrencies. Investors should exercise diligence and consider the broader market dynamics before making investment decisions.
