The crypto market crashing has been witnessed globally, a massive bloodbath in the last 24 hours, with leading asset classes such as the equity and crypto markets suffering enormous losses. In particular, the cryptocurrency market has just experienced its worst three-day sell-off in over a year, with losses of up to $510 billion since August 2.
The market’s decline has been driven by renewed worries of a US recession, Yen depreciation, slowing growth in large IT firms, and continuing geopolitical concerns, with the Russia-Ukraine and Israel-Hamas disputes showing no signs of resolution. Let us look at each reason in depth.
What are the reasons behind the crypto market crashing?
The global crypto market has suffered greatly in recent hours, with the broader crypto market crashing 15.80% and losing more than $300 billion. The causes outlined below might have triggered what has now become a huge downturn in both crypto and regular markets:
▪️ Bank of Japan Interest Rate Hike & Yen Depreciation: Recently, the Bank of Japan raised its benchmark interest rate by 25 basis points, bringing interest rates from 0% to 0.25%—a major move given that it was the first rise in years. That monetary tightening led to the yen skyrocketing and the Nikkei stock index plummeting.
Taking advantage of the extremely low interest rates, many investors had borrowed yen for almost no cost to finance investments in other assets. With the rate rise, these leveraged positions became more expensive to maintain, prompting a rush to unwind them. This action is causing widespread turmoil in the financial markets, including cryptocurrency, contributing to the crypto market crashing.
▪️ Recession Fears in the United States: This is most certainly the primary reason for the recent market bloodbath. The prospect of a U.S. (and worldwide) recession looms, and economic indicators are flashing warning flags. As a result, risk assets such as cryptocurrency are losing value as investors seek safer havens, contributing to the crypto market crashing.
According to a tweet from The Kobeissi Letter, the Sahm Rule recession indicator increased to 0.53 in July from 0.43, indicating that the US economy is in a recession. The Sahm Rule indicates a downturn when the unemployment rate rises 0.5 percentage points over the prior 12-month low.
Regarding the recession, famous economist Peter Schiff comments, “Central banks have been playing with fire for years. The planet is about to be torched. They maintained interest rates artificially low, resulting in a worldwide debt bubble. However, when inflation increased, rising interest rates punctured the bubble. It’s time to pay the piper. The game is over.”
▪️ A Global Bloodbath in the Tech Sector: The market capitalization of global mega-tech companies fell substantially in July, owing to disappointing quarterly results and worries over excessive valuations, causing investors to turn their emphasis away from these industries. Not only that, but it also lowered the interest of individuals in crypto projects linked to these industries.
Several large businesses, including Microsoft and Intel, reported lower-than-expected Q2 results, with industry leader NVIDIA pummelling by predictions of approaching rate cuts in September, causing money to flow back into smaller, trailing competitors.
▪️ Geopolitical Concerns: Rising geopolitical concerns in the Middle East, as well as the current conflict in Gaza, are contributing to growing market instability. These conflicts increase global risk aversion, with investors withdrawing from volatile assets such as cryptocurrency in favour of safer alternatives. As market participants react to the growing unpredictability of world events, the volatility in this sector is exacerbating the overall sell-off.
Is the Crypto Market Crashing? Is there any buying or selling opportunity?
The recent crypto market crash has stirred a lot of debate among investors, analysts, and enthusiasts. Some see it as a buying opportunity, while others are more cautious, considering it a signal to sell.
The crypto market crash provides an opportunity to buy assets at significantly lower prices, making it advantageous for those who believe in the long-term potential of cryptocurrencies. Historically, crypto markets have gone through cycles of booms and busts, and understanding these cycles can help in timing investments.
Continuous innovation in blockchain technology and the growing adoption of cryptocurrencies can drive future growth, suggesting that investing during downturns can yield substantial returns if these trends continue. Adding cryptocurrencies to a diversified investment portfolio can enhance returns and reduce risk, especially if purchased at lower prices.
Conversely, selling during a crypto market crash could be a prudent strategy to minimize losses, especially given the highly volatile nature of crypto assets. If cryptocurrencies constitute a significant portion of a portfolio, a crash might prompt rebalancing to align with risk tolerance and investment goals.
Conclusion
Today’s crypto meltdown is the result of a combination of various factors rather than a single cause. Political turmoil, economic uncertainty, market corrections, and geopolitical tensions have all contributed to what seems like a perfect storm, leading to the crypto market crashing.
Despite the ongoing crypto market turbulence, the inherent volatility of the market remains. To mitigate potential risks, investors should proceed with caution, conduct thorough research, and employ a diverse range of strategies. While the recent volatility is significant, it’s important to approach the cryptocurrency market with care and a long-term perspective.
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