On August 5th, the crypto market experienced a brutal crash, with Bitcoin and Ethereum plummeting by nearly 20%. While unforeseen by many, the seeds of this downturn were sown months ago in the form of rampant leverage and a reliance on cheap Japanese loans.
Leveraged trading, where traders borrow funds to amplify their positions, has long been a fuel source for crypto markets. However, this practice becomes a double-edged sword when coupled with volatile assets like crypto. As open interest (a measure of leverage) soared to nearly $40 billion, the market became increasingly susceptible to even minor price swings.
Enter the Japanese yen. With interest rates in the US rising steadily, savvy traders turned to Japan, where rates remained near zero. This “yen carry trade” allowed them to borrow cheaply in yen and use the funds for leveraged crypto trades. However, the party came to an abrupt end on July 31st when the Bank of Japan unexpectedly raised rates. This triggered a surge in the yen’s value, making those yen-denominated loans significantly more expensive.
Faced with margin calls (demands from lenders to add more funds) and escalating costs, traders were forced to unwind their positions in a fire sale. This mass exodus, amounting to over $1 billion in liquidated leveraged positions, fueled the downward spiral.
However, this crash may be a blessing in disguise. With leverage significantly reduced and yen loans paid down, the market is now in a healthier position. Additionally, the yen’s rise may be nearing its peak, offering some relief.
Also Read: Bitcoin And Ether ETFs See Record $5.9B Trading Day As Market Crashes
Looking ahead, the possibility of central bank intervention offers a glimmer of hope. A potential rate cut from the Bank of Japan, coupled with the looming US recession (indicated by a recent unemployment spike), could push interest rates down and stabilize the markets. This scenario might pave the way for a late-summer crypto rebound.
The takeaway? Crypto thrives on volatility, but excessive leverage can exacerbate risks. While a recovery may be on the horizon, the recent crash serves as a stark reminder: always approach leveraged trading with caution.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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