The cryptocurrency market is experiencing its worst daily performance since the collapse of the FTX crypto exchange in November 2022, mirroring extreme selloffs across the global equity market. On August 5, the combined market capitalization of all crypto assets plunged by up to 15.80%, reaching a six-month low of $1.694 trillion. Leading the losses were Bitcoin (BTC) and Ether (ETH), which together control over 70% of the overall crypto market share.
The core of these declines lies in the reducing appeal of yen-dollar carry trades. Typically, traders borrow funds in a low-interest currency (like the yen), exchange them for a high-interest currency (like the US dollar), and use the proceeds to buy stocks and bonds. However, on July 31, the Bank of Japan (BOJ) increased its interest rate to 0.25%, raising speculation of further hikes. In contrast, the US Federal Reserve is likely to start cutting interest rates in September due to rising unemployment and slower economic growth.
TOTAL crypto market capitalization. Source: TradingView
As a result, the yen surged to its best levels versus the dollar since January 2024, disrupting the profitability of yen-to-dollar carry trades. Traders who borrowed yen to invest in riskier assets are now closing these positions to avoid higher borrowing costs and repay debts. This has led to a rout in the stock and crypto markets, with geopolitical tensions in the Middle East and recessionary risks in the US adding to the selling pressure.
Over $1 Billion in Crypto Liquidations
The crypto market decline has been exacerbated by $1.08 billion in liquidations over the last 24 hours, with $919.54 million being long positions. The significant liquidation of long positions suggests that many traders were overly bullish and heavily leveraged. When the market moves against these positions, it triggers a cascade of liquidations, exacerbating the downward price movement.
Currency carry trade explained
Meanwhile, the crypto futures market’s open interest (OI) has dropped by approximately 15% in the same period, indicating that traders are closing their positions and stepping back from the market. Funding rates for most top coins, including Bitcoin and Solana, have dipped into negative territory, suggesting bearish sentiment among futures traders.
Descending Triangle Breakdown
The crypto market’s losses are part of a descending triangle breakdown move. Descending triangles are considered bearish reversal patterns characterized by falling trendline resistance and horizontal trendline support.
JPY/USD daily price chart. Source: TradingView
As of August 5, the crypto market capitalization had entered the breakdown stage, eyeing further declines towards $1.596 trillion, which served as support during the December 2023-February 2024 session.
