Written by Matt Hougan, Chief Investment Officer at Bitwise
Compiled by Luffy, Foresight News
This weekend, the cryptocurrency market saw a sharp sell-off. From 4 p.m. last Friday to 7 a.m. Monday, Bitcoin fell nearly 20%, from $63,356 to $51,026. Ethereum performed even worse, falling from $3,307 to $2,234, a drop of more than 30% (Note: The author's US time zone is 12 hours behind Beijing time). So far, the cryptocurrency market has rebounded to some extent.
Of course, cryptocurrencies aren’t the only market taking a nosedive.
Global capital markets are turbulent due to rising concerns about recession and geopolitics. In Japan, the Nikkei just experienced its worst day since 1987, falling more than 12%. In the United States, Nasdaq futures fell more than 4%, and the VIX volatility index has risen 100% since last Friday.
If you are like most cryptocurrency investors, you experience violent mood swings, fear or despair. For many, the most shocking emotion is anger.
“Isn’t cryptocurrency a hedge against global uncertainty? What’s going on?”
I feel the same way. But based on my experience of managing cryptocurrency funds full-time for more than six years, there is one thing I feel more deeply, and that is opportunity.
Lessons from the COVID-19 sell-off
The last time the market crashed like this was on March 12, 2020. That was the day the world realized that the coronavirus pandemic would have a significant impact.
Just in case you forgot, let me remind you: it was chaos.
On March 12, the Dow Jones Industrial Average fell 2,353 points, its biggest one-day drop since 1987. Technology stocks and commodities fell sharply. We all thought the global economy was coming to an end. The next morning, the president declared a national emergency.
Bitcoin saw the biggest drop of all assets, falling 37% from $7,911 to $4,971. It was a dramatic dive that wiped out a year’s worth of gains in 24 hours.
The feeling was that we might be screwed. The media claimed that Bitcoin had failed the test as a hedge asset.
Then something remarkable happened. As world leaders took steps to stabilize their economies (lowering interest rates, printing money), Bitcoin began to rise. A year later, Bitcoin was trading at $57,332, up more than 1,000%.
In retrospect, March 12, 2020 was not a day to panic. It was the best time to buy Bitcoin in a decade.
In hindsight, it’s easy to see why. Bitcoin didn’t change fundamentally because of the coronavirus pandemic. The maximum number of Bitcoins (21 million) was the same on March 11th and March 12th. You didn’t need to rely on any bank, government, or company to store your wealth in Bitcoin on March 11th, and the same is true on March 12th.
At the same time, the coronavirus pandemic has added more reasons for Bitcoin’s long-term rise. It has shown that central banks will come to the rescue of economies at the first sign of trouble. It has demonstrated the limitations of centralized institutions. And it has reminded us that the future will be more networked and digital.
These changes suggest that Bitcoin will become more important, not less important. And in the long run, that’s exactly what’s happening.
I saw the same thing today.
The reasons for the market crash
I don't want to spend too much time reviewing what led to the current market pullback. In short: Weak U.S. economic data released on Friday raised concerns about a global economic slowdown. This triggered panic in Asia, where a rapid unwinding of yen carry trades (a strategy designed to exploit interest rate differentials between currencies) led to a sharp drop in Japanese stocks. Separately, concerns about geopolitical risks in the Middle East were also growing, with Iran threatening to attack Israel.
These events coincided with peculiarly negative developments in the cryptocurrency markets, with a large market maker (Jump Trading) running into trouble and seeing a large number of positions forcefully liquidated.
All of this happened on a summer weekend when liquidity was low, further exacerbating the decline.
But watch what happens next: We are about to see a repeat of the COVID-19 script.
The federal funds futures market has already priced in aggressive responses. A week ago, Fed Chairman Jerome Powell was downplaying the need for rate cuts this year, with markets pricing in just an 11% chance of a 50 basis point rate cut at the Fed’s September meeting. Now, the market has raised that probability to 98%. Some are even calling for an “emergency rate cut” before the September meeting.
Probability of target rate for the Federal Reserve meeting on September 18, 2024. Source: CME Fedwatch. Data as of August 5, 2024.
So are the printing presses really coming? If history is any guide, the answer is yes. It happened during the coronavirus pandemic, it happened after the euro crisis in 2010, and it happened in 2008. And it will happen again if the events of this weekend lead to real economic turmoil.
What to watch for in the future
In the short term, the key question is whether the cryptocurrency market has bottomed. A sharp correction in the cryptocurrency market could feed back on itself, creating a downward cycle. This is because, as prices fall, leveraged traders face margin calls and are forced to sell. We have already seen over $1 billion in futures liquidations, and it is unclear whether we have bottomed.
Additionally, there is a need to keep an eye on the health of companies in the crypto ecosystem. As we saw in the 2021 crisis, very sharp volatility can bring down companies with overleveraged balance sheets. There are already rumors that at least one market maker (Jump Trading) is facing challenges, which could extend the downtrend if it spreads.
I will also be watching ETF flows to see if ETF investors take advantage of this pullback to sell or buy more. These three factors will largely determine where we go in the short term.
But my real advice is to ignore the short-term and look beyond. Bitcoin is a volatile asset that can go up and down in a big way. It has always been this way and it will continue to be this way. The current moment proves once again that timing the market is foolish.
Bringing a trading desk mentality into crypto is a mistake. You are investing in a once-in-a-generation change in how global money works. Resist the urge to focus on intraday prices and instead focus on where Bitcoin could be next year, five years, and ten years from now.
When you get your first job on Wall Street, they will tell you that the four most expensive words in finance are “this time is different.”
Historically, whenever we've seen this kind of global economic panic, cryptocurrencies have initially fallen, but have risen over the following year. Maybe this time it's really different, but I wouldn't bet on it. In fact, I'd bet on it repeating itself.
