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Bitcoin recently experienced a sharp 30% drop in one week, reminiscent of the March 2020 crash when markets fell due to the discovery of Covid. After plunging to just over $49,000, Bitcoin’s price has been rebounding. At the time of writing, the price is slightly above $57,000.
This rapid and severe drop, though harsh, is not unusual in previous bull markets. Alex Thorn, head of research at Galaxy, and Daniel Cheung, co-founder of Syncracy Capital, compared this decline to the one triggered by the Covid-19 pandemic in 2020, though it was less severe. Despite the initial shock, some experts like Matt Hougan from Bitwise see this drop as a buying opportunity. A strong rebound and bull market followed the 2020 decline.
This recent market drop can be attributed, in addition to recession fears in the US, to the Bank of Japan. On August 5, the crypto market had one of its worst days in years. Heavy leverage use by traders amplified market risks for months. The sudden rise in the yen’s value triggered this sharp decline, and rising yen loan costs eventually pushed traders to reduce exposure and deleverage their positions.
Leverage, often used to maximize short-term profits, was primarily financed through low-interest yen loans. In 2022, with Japan’s interest rates remaining extremely low, traders borrowed heavily in yen to finance their transactions. This “yen carry trade” generated significant profits during the 2023 bull market, amplifying gains or losses. However, on July 31, the Bank of Japan raised interest rates on short-term government bonds, making yen loans more expensive and prompting a massive sell-off to avoid margin calls.
After liquidating over a billion dollars in leveraged positions between August 4 and 5, the markets could see a recovery. The USD/JPY pair seems to have little room for further declines. An intervention by the Bank of Japan to stabilize its market could mitigate the impact on borrowers, and rising unemployment in the US might prompt the Fed to cut interest rates more aggressively. If these scenarios materialize, the cryptocurrency market could rebound by late summer. However, this volatility highlights the importance of caution with leveraged trades.
Also on Monday, the cryptocurrency market entered an “extreme fear” zone for the first time in two years, with the Crypto Fear & Greed Index scoring 17 out of 100, the lowest since July 2022. This drop in sentiment coincided with a $168.4 million outflow from US Bitcoin ETFs, mainly from Grayscale Bitcoin Trust and ARK 21Shares Bitcoin ETF.
This loss of confidence occurred as Bitcoin and Ether fell by 10% and 18% respectively in just two hours, leading to over $600 million in leveraged long positions being liquidated. US stock markets were also affected, with billions wiped out due to the Bank of Japan’s decisions, weak US employment data, slowing growth in major tech companies, and renewed recession fears.
As the cryptocurrency market experienced this high volatility, Bitcoin “whales,” or holders of large amounts of BTC (between 1,000 and 10,000 BTC), took advantage of lower prices to increase their holdings. In contrast, small investors, holding less than 1 BTC, sold their assets in panic, according to IntoTheBlock. Meanwhile, Bitcoin ETFs saw net outflows of $168 million. Despite these outflows, Bloomberg Intelligence’s Eric Balchunas noted that ETF investors showed stronger resilience than expected, with only 0.3% of assets leaving the funds. Notably, the largest spot fund, BlackRock’s IBIT, recorded no net outflows. Balchunas commented that the overall flow level for the day was negligible, though he anticipated possible additional outflows during the week. “It’s peanuts,” Balchunas said, referring to the overall flow level from yesterday. “That said, it’s one day, and I could see more outflows this week. I thought a few billion would leave. So far, it looks much weaker than that.”
Despite Bitcoin’s recent price drop, mining difficulty reached a new all-time high of 90.67 trillion hashes, according to BTC.com data. Mining difficulty represents the computational power needed to secure the blockchain, and its increase means miners must use more energy and resources to maintain operations. This rise in difficulty has significantly reduced margins for publicly traded mining companies. Nishant Sharma from BlocksBridge Consulting explained that this forces miners to diversify their revenue streams or double down on Bitcoin, hoping for a market rebound. Some miners repurpose their infrastructure for high-performance computing applications like AI, while others adopt a Bitcoin accumulation strategy, following MicroStrategy’s example. With mining rewards halved in the last April halving, only the most efficient miners can continue to operate profitably.
Earlier, during the Bitcoin 2024 conference in Nashville, Donald Trump promised, if elected in November, to fire SEC Chair Gary Gensler and create a “strategic bitcoin reserve” by stopping the sale of bitcoins held by the US government. He also announced the end of anti-crypto policies to support the US digital asset industry. During his speech, Bitcoin’s price dropped to around $66,600 before rebounding to $68,000. Trump also mentioned his intention to keep the 213,000 bitcoins (worth nearly $14.5 billion) held by the government in a national strategic reserve. He reiterated promises to pardon Silk Road founder Ross Ulbricht, stop the development of a central bank digital currency (CBDC), and support stablecoins and the Bitcoin mining industry. Trump positioned himself as the pro-innovation and pro-Bitcoin candidate America needs.
The Grayscale Bitcoin Mini Trust began trading on Wednesday, July 31, following SEC approval. This product is designed as a smaller version of the Grayscale Bitcoin Trust (GBTC) and aims to provide low-cost Bitcoin exposure, attracting investor interest. New shares of the mini trust are distributed to GBTC shareholders, with a certain amount of Bitcoin transferred to the trust. Zach Pandl from Grayscale explained that the product launch is timely, with increased attention on cryptocurrencies due to the Federal Reserve’s interest rate policy and political discussions around the US dollar’s weakness, supported by Donald Trump’s political platform. Pandl added that investors should consider holding Bitcoin in their portfolios to protect against a prolonged period of dollar weakness.
On the same day, Fidelity International announced the listing of its bitcoin-backed exchange-traded product (ETP) on the London Stock Exchange, exclusively for professional investors. The Fidelity Physical Bitcoin ETP, with the ticker FBTC, has an annual management fee of 0.35%. This launch follows the UK’s Financial Conduct Authority’s approval of exchange-traded notes backed by crypto assets for professional investors in May. Fidelity’s ETP, fully backed by physical bitcoin and tracking its price movements, was initially launched in February 2022 on the Deutsche Börse Xetra and the SIX Swiss Exchange. Stefan Kuhn from Fidelity International highlighted that this approval reflects the growing acceptance of digital assets offered through a secure and regulated exchange. In February 2024, Fidelity reduced the management fee of its bitcoin ETP from 0.75% to 0.35% to make the product more competitive.
Genesis Global completed its restructuring process after filing for bankruptcy protection in January 2023. The company began distributing approximately $4 billion in digital assets and cash to its creditors. On average, Genesis creditors will recover 64% of their cryptocurrency repayments, although this varies by coin. For instance, Bitcoin creditors will recover 51.28% of their bitcoins, Ether creditors 65.87%, and Solana creditors 29.58%. Creditors in stablecoins or US dollars will receive 100% of their missing funds. Genesis, which owed about $3 billion to its top 50 creditors, including Gemini, VanEck, and Cumberland, was severely affected by the market contagion following the collapse of Terra and FTX. Despite a loan from its parent company, Digital Currency Group, Genesis had to close withdrawals and file for bankruptcy after further losses due to Alameda Research’s collapse. Currently, Genesis and DCG are involved in a civil lawsuit filed by New York Attorney General Letitia James, accusing the firms of defrauding investors.
According to Peter Brandt, the recent decline in Bitcoin following the April 2024 halving resembles the pre-bull run correction of 2016-2017. Brandt noted that the current 26% drop, where Bitcoin’s price fell below $50,000, is similar to the 27% post-halving decline in 2016, when the price dropped from $650 to $474 before surging to $20,000 in December 2017. Despite this, signs of recovery are already visible, with Bitcoin rising to $57,000. Benjamin Cowen and Tim Kravchunovsky suggest that crypto assets could recover more quickly than other risk assets, as seen in 2020. Kravchunovsky emphasizes that macroeconomic factors are the main drivers of this sell-off and predicts a possible decoupling of cryptocurrencies from traditional stocks, similar to the post-pandemic recovery.
The presented information is as of August 7th, 2024, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
