The domino effect of the global market sell-off has hit crypto on another level
In the fast-moving world of crypto, we are used to the dramatic ups and downs. The nature of blockchain is both enhancing and disrupting the existing financial systems. We tend to forget how closely blockchain has become an integral part of our lives until a crisis hits across global markets.
Ever since TradFi embraced crypto via the Bitcoin ETFs, leading cryptos have grown a closer correlation to US equities and interest rate outlooks, which is indicative of Bitcoin’s rising status as a mainstream asset class. The recent flash crash on Aug. 5 has shown this correlation, as a serial collapse across all macro risk assets created a perfect storm for crypto.
To start, the combination of very heavy positioning across popular macro trades, namely long USD/JPY, growth/AI stocks, and soft-landing trades were unraveled into heavy stop losses. One of the triggering events was investors fearing a possible recession, as the disappointment from single non-farm payroll data suggested.
The fall of domino
The heavy sell-offs might be overblown by the deteriorating market conditions in Japan and perceived recession risks in the U.S., but the pain felt in the crypto space is real. The drop of nearly 15% in Bitcoin’s price in the week of Aug. 5 led to a wipeout of around $1 billion for both Bitcoin and Ethereum as investors rushed to exit and risk deleveraging.
Yet, the long-term growth potential of crypto remains promising, and the recent sell-offs were more about traders’ position adjustment and profit and loss (PNL) protection. Core inflation has been trending down and setting the ground for the Fed to cut rates, and we are far away from an imminent recession.
In a recent conversation with Augustine Fan, the founding partner of a leading DAO that focuses on-chain clearing and settlement of financial assets, SOFA.org, he explains how the crypto market has become more influenced by the macro environment and sentiment. “The August collapse was a symptom of what happens when everyone rushes to the exit at the same time, and the magnitude of the sell-off is a reflection of how much PNL damage there has been, rather than a true statement of economic fundamentals.”
In the aftermath of sell-offs, risk assets have been making a recovery over the past few weeks. The macro market made a comeback, with major indexes such as the Nasdaq rising by more than 5% in the days following the crash. As for crypto, the recovery has been slow, as concerns about the US government selling and Mt. Gox repayment continues to shake investors’ confidence. However, the long-term outlook remains positive.
“We have grown more optimistic about crypto prices here given the much lighter market positioning, as well as the longer-term tailwinds of a more crypto-friendly US administration, continued inflows from TradFi, and a more dovish Federal Reserve that is about to embark on their first-rate cuts, ”he added.
Crypto for all
There is no doubt that crypto markets have become more developed and mature over the past few years. As more protocol builders with stronger Web2 and TradFi experience join the sector, the growth of the overall crypto ecosystem remains promising in the foreseeable future. Heading into the remainder of the year, investment options such as crypto spot ETFs, U.S.-listed crypto mining stocks and crypto-focused stocks offer investors higher beta exposure.
Aside from the mainstream financial options, the more interesting alpha opportunities will always be found within the crypto ecosystem. Blockchain innovations have made it possible for average users to access complicated financial products that used to be only available to institutions. Projects such as SOFA.org aim to clear and settle financial products on-chain, with assets securely held in a smart contract vault at all times.
The old days of the wild, wild west in crypto have long gone. It has become more important for investors to understand the intricacy between crypto and the broader global markets as the industry has seen more rapid mainstream adoption. On the bright side, we now have better tools than ever to effectively manage risks while seeking strong yields with new suites of products both on-chain and in TradFi.
With contributions from Augustine Fan, Founding Partner, SOFA.org.
Yiwei Wang is an avid blockchain enthusiast with a focus on the intersection of crypto, economics, and public policy. He was previously the Global PR Lead at Babel Finance and he began his career at Ogilvy in Beijing. He is currently the Head of Global PR at Metalpha.
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