Today, the cryptocurrency market’s losses mirror extreme selloffs across the global equity market, which have already caused over $1 billion in liquidations.
The cryptocurrency market is on track to deliver its worst daily performance since the collapse of the FTX crypto exchange in November 2022, mirroring a global market rout.
Yen carry trades hurt global risk sentiment
On Aug. 5, the market capitalization of all crypto assets combined plunged by up to 15.80% to its six-month low of $1.694 trillion. Leading the losses were Bitcoin
BTC $50,882 and Ether ETH $2,262, which together control over 70% of the overall crypto market share.
At the core of these declines is the reducing appeal of the yen-dollar carry trades.
In a typical carry trade, 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, among other assets. In an ideal setting, investors profit from the difference in interest rates.
This strategy has yielded positive results for investors because of Japan’s near-zero rate policy compared to the US’s higher rates.
However, on July 31, the Bank of Japan (BOJ) increased its interest rate to 0.25%, raising speculation of further hikes among traders. In contrast, the US Federal Reserve will likely start cutting interest rates in September due to rising unemployment and slower economic growth.
As a result, the yen surged to its best levels versus the dollar since January 2024. This rapid appreciation has disrupted the profitability of the carry trade from the yen to the dollar.
Simply put, traders who borrowed yen to invest in riskier assets are now closing these positions to avoid higher borrowing costs and repay debts. The result is a rout in the stock and crypto markets, with geopolitical tensions in the Middle East and recessionary risks in the US also adding to the sell pressure.
Over $1 billion in crypto liquidations
The crypto market decline has picked up momentum further due to $1.08 billion of liquidations in the last 24 hours, of which $919.54 million are longs. Meanwhile, the crypto futures market’s open interest (OI) has dropped by approximately 15% in the same period.
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