August 5 went down in history as “Bloody Monday.” The collapse occurred not only in cryptocurrencies but also in stocks around the world, gold, and silver. Read our article to find out the reasons for the broad market’s decline and what will happen next.
What happened?
On August 5, global financial markets experienced the largest one-day drop since October 19, 1987 (also known as Black Monday). A wave of sales and liquidations swept the broad financial asset market.
The cryptocurrency market fell by 15.78% in one day to $1.76 trillion. Since August 2, the market has experienced the largest three-day sell-off in the last year, losing more than $500 billion.
The market capitalization of cryptocurrencies, according to CoinMarketCap
BTC fell below $50,000 for the first time since February, hitting a low of $49,052. ETH dropped to $2185, losing 32.6% from August 1 to August 5.
According to Kaiko, “Bloody Monday” was one of the worst periods in terms of the scale of the collapse of the Bitcoin price. However, it is still very far from a collapse in the spring of 2021.
The volume of liquidations of crypto traders’ positions exceeded one billion dollars per day! Long positions accounted for more than 90% of this amount. Market participants who sold their bitcoins recorded about $1.38 billion in realized losses.
In absolute terms, this is the 13th largest capitulation in history in dollar terms.
The Fear and Greed Index dropped to 26 points, indicating panic among investors, compared to 74 points a week earlier.
The stock market has fallen over the past 4 weeks
The S&P 500 index lost 3.75%, and the Nasdaq lost 4.74% daily. Since their peaks in mid-July, the indices have lost 10.23% and 16.86%, respectively.
Causes of the collapse
Typically, such financial disasters involve many fundamental and technical factors at once. Today, economic, geopolitical, and political factors are mixed in the world. Due to the close correlation, digital assets are negatively affected by the unstable situation with the US stock market. The problems of the American economy have a significant effect on cryptocurrencies.
Economic problems
The basis for the sell-off is the Fed’s tight policy, which has been in place since March 2022.
Market participants have been actively criticizing J. Powell for too tight a monetary policy. High rates are already hurting company profits. Because of this, the reporting season was dominated by sales. Even good reports after Gap Up were sold (for example, META). Americans started spending less because money was too expensive.
The Fed’s interest rate decision of November 2021
Investors are already afraid of a hard landing. Goldman Sachs analysts have increased the probability of a recession in the US economy from 15% to 25%.
The US labor market, while still strong, is showing signs of cooling. The latest unemployment report was the worst since November 2021 — 4.3%, despite expectations of 4.1%.
Unemployment rate in the US from September 2021
The artificial intelligence bubble
In 2024, Microsoft, Alphabet, Amazon, and Meta invested more than $100 billion in AI. It seems that the peak of investor interest in this area has already passed and skepticism has begun to grow instead: in particular, potential shareholders do not quite understand how the invested funds will be returned. The news of poor financial results of high-tech giants could have signaled to the market that pessimistic forecasts were being confirmed and that the industry as a whole had taken a wrong turn.
The Japanese tsunami
Recently, the Japanese government decided to oblige the Japanese state pension fund (whose assets amounted to $1.5 trillion) to sell most of its international assets and invest in Japan. This decision was made on July 9. Market participants did not take this news into account, as they believed that it would be implemented later, in coordination with the Fed. They believed that when the Fed started to cut the rate, the Japanese Central Bank would start to raise it. It was assumed that in such a situation, cash flows would meet and the market would not fall.
At the peak of the market (July 10, 11), the Japanese were ordered by the government to get out of US securities. According to the GPIF, only one pension fund had shares of American companies worth about $400 billion. And there are other funds as well. Therefore, the volume of sales by the Japanese was huge.
Geopolitics
Tensions between Israel and Iran reached their peak in early August. The main fear was that the conflict would spread to the entire region and possibly the world. In this regard, investors were actively getting rid of high-risk assets. This list includes stocks and cryptocurrencies.
Political factors
The United States is currently experiencing the biggest political crisis in 40 years. The struggle between the two political parties has entered an active phase as the US presidential election approaches. The radicalism of the candidates’ and political parties’ statements is fueling social tensions, which could further destabilize not only the economy but the country as a whole.
From the perspective of the cryptocurrency market, unlike Donald Trump, who spoke at the Bitcoin 2024 conference, where he spoke favorably about cryptocurrencies. Kamala Harris, who is a candidate for the Democratic Party, has not made any statements about digital assets. The concern of crypto market participants is understandable, as the probability of her winning is quite high.
Mt. Gox
The bankrupt Mt. Gox exchange continues to pay off its debts to its creditors. It is important to note that it has already paid compensation in BTC and BCH to 17,000 creditors out of 24,000, which is why the inflows to the cryptocurrency exchange have been significant in recent weeks. In addition, the exchange has made several large transactions. For example, on July 31, it sent 33,964 BTC ($2.25 billion at the time) to an unknown address and made an internal transfer of 47,229 BTC ($3.13 billion).
Crypto-ETF
There was a lot of speculation on the web about the approval of the ETH-ETF. Trading did not start immediately after approval. Few expected such a time lag. On the first day of trading, the ether-based ETF showed a volume of $1.08 billion, which is only 23% of the BTC-ETF’s first day’s volume. In the following days, the market recorded significant pullbacks. The main seller was the Grayscale fund. As in the case of BTC, until Grayscale records enough of its ETH, one should not expect significant inflows.
ETH-ETF net inflows/outflows since launch
Jump Crypto
The network has been actively discussing the possible involvement of a major player in the market crash. Online analysts hinted at the liquidation of the market maker Jump Crypto, which unlocked 120,000 wETH in Lido and sold most of them. This affected token prices in the DeFi sector in particular. ETH itself reacted by falling by almost 18.5% in two hours.
What’s next?
To analyze and make a decision, it is worth looking at what the big wallets did on Bloody Monday. And the situation unfolded quite interestingly:
The whales were actively buying BTC when the market was falling on August 4 and 5. They bought 30,000 BTC worth ~$1.7 billion.
The same situation was observed in ETH. Wallets containing 10 -10,000 ETH and 10,000 – 100,000 ETH bought a total of 757,000 ETH. These purchases took place a little later on August 7.
It seems that crypto whales took this correction as an opportunity to buy at discounts. The markets are already recovering. However, the downside risks still make market participants very cautious.
We should also not forget about BlackRock. The investment giant already controls more than 347,000 BTC worth $20.5 billion. The fund is among the top 3 holders in the world.
In September, traders expect the Fed to cut the rate for the first time since March 2022. Inflation dynamics and a cooling labor market will force the regulator to launch a looser monetary policy shortly.
Also, historically, the US stock market grows in an election year. Due to the close correlation between cryptocurrencies and stocks, this trend can have a positive impact on digital assets.
MOVO analysts expect a full-fledged altcoin season at the end of Q2 and the beginning of Q3. Most altcoins are at optimal price levels. For medium-term traders, it is recommended to pay attention to them.
Historically, October is one of the best months for cryptocurrencies. Therefore, it is worth placing positions a little earlier.
Volatility will increase significantly in the 2nd half of 2024. Therefore, it is recommended to pay a lot of attention to risk and money management.
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