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Author: Matt Hougan, Chief Investment Officer of Bitwise; Compiled by: 0xjs@Bitlink Vision
The cryptocurrency market sold sharply this week.As of 7 a.m. on Friday, Bitcoin fell nearly 20%, from $63,356 to $51,026 as of 7 a.m. Monday.Ethereum performed worse, falling from $3,307 to $2,234, a drop of more than 30%.
Cryptocurrencies are not the only ones, of course.
Global capital markets are turbulent due to intensified economic and geopolitical concerns.In Japan, the Nikkei index just experienced its worst day since 1987, with a drop of more than 12%.In the U.S., 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 will experience drastic fluctuations in your emotions, including fear or despair.For many, the most shocking emotions are emotions like anger.
I thought cryptocurrencies should hedge global uncertainty!?What’s going on?
I feel the same way.
But one thing I felt more deeply, based on my experience of managing cryptocurrency funds full-time for over six years: Opportunities.
Lessons from the sale caused by the COVID-19 pandemic
The last time the market collapsed like this was on March 12, 2020.That day, the whole world realized that the new crown epidemic was a big deal.
Just in case you forget, let me remind you: it was chaos.
On March 12, the Dow Jones Industrial Average fell 2,353 points, the biggest single-day drop since 1987.Technology stocks and commodities both fell sharply.We all think that the global economy is about to end.The next morning, the president declared a national emergency.
Of all assets, Bitcoin fell the most, from $7,911 to $4,971, a 37% drop.This is a thrilling single-day trend, erasing a year’s gains in 24 hours.
It feels like we may never be able to recover.Media claims Bitcoin failed as a hedge asset.
Then something amazing happened.As global leaders take steps to stabilize the economy—lower interest rates, print money—bitcoin begins to rise.A year later, Bitcoin trading price reached $57,332, up more than 1,000%.
In retrospect, March 12, 2020 was not a day worth panic.This is the best time to buy Bitcoin in a decade.
In hindsight, the reason is easy to understand.Bitcoin has not undergone fundamental changes due to the COVID-19 pandemic.On March 11 and March 12, the maximum amount of Bitcoin (21 million) was the same.On March 11, you don’t need to rely on any bank, government or company to store wealth in Bitcoin, as does March 12.
At the same time, the COVID-19 pandemic has also provided more reasons for Bitcoin’s long-term rise.It shows that central banks will take action to save the economy whenever there is a sign of trouble.It demonstrates the limitations of centralized institutions.It reminds us that in the future, it will be more online and digital.
These changes all indicate that Bitcoin’s importance will continue to increase, not decrease.In the long run, this is indeed the case.
Today I saw the same scene.
What caused this market crash
I don’t want to spend too much time reviewing the reasons that are causing the current market pullback.
But in short: weak economic data released by the United States on Friday sparked concerns about a global slowdown.This sparked panic in Asia, with the rapid closing of yen arbitrage trading, a strategy designed to exploit the interest rate spread between currencies, causing a sharp decline in Japanese stocks.Increasing concerns about geopolitical risks in the Middle East will not help, as Iran threatens to attack Israel.
These events conflict with the particular negative developments of the cryptocurrency market, with a large market maker (Jump Trading) in trouble and facing a large number of ETH positions being forced to be liquidated.
All of this happened on a summer weekend with less liquidity, further exacerbating the trend.
But be aware of what happens next: It looks like we are going to see a repeat of the Covid script.
The federal funds futures market has included aggressive responses into pricing.A week ago, Fed Chairman Jerome Powell was also downplaying the need for a rate cut this year, with markets expecting a 50 basis point probability cut by the Fed in September meeting is just 11%.Today, the market has increased this possibility to 98%.Some even called for an “emergency rate cut” before the September meeting.
Target interest rate probability of the Federal Reserve meeting on September 18, 2024
Source: CME Fedwatch.Data is as of August 5, 2024.
So,Will the money printing machine really come?If history can be learned from it, the answer is yes.It happened during the COVID-19 pandemic.It also happened after the 2010 European debt crisis.It happened in 2008.If the events that happened this weekend resulted in real economic turmoil, that would happen again.
What to pay attention to in the future
In the short term, the key question is whether the cryptocurrency market has bottomed out.A sharp pullback in the cryptocurrency market may cycle on its own, forming a downward cycle that requires exhaustion of itself before bottoming out.This is because, as prices fall, leveraged traders face margin requirements and are forced to sell.We have seen more than $1 billion in futures clearings and it is unclear whether we have bottomed out.You can pay attention to whether mandatory liquidation will slow down here (https://www.coinglass.com/LiquidationData).
It is also worth paying attention to the health of companies in the crypto ecosystem.As we have seen in the 2021 crisis, very drastic volatility could knock down companies with over-leverage balance sheets.As I mentioned, there have been rumors that at least one market maker (Jump Trading) is facing challenges and that if contagious occurs, it may prolong the downtrend.
I will also pay attention to the liquidity of ETFs to see if ETF investors will take advantage of this pullback to sell or buy more.These three factors will largely determine our direction in the short term.
butMy real advice is to ignore short-term factors and turn your eyes to the distance.Bitcoin is a volatile asset with large fluctuations.This has always been the case, and this will continue for a while.Such moments prove once again that seizing the timing of short-term trading is futile.
It is wrong to bring the trading counter mentality into the cryptocurrency space.You invest in a once-in-a-lifetime change in the way global currency works.Resist the urge to focus on intraday prices, but focus on the levels that Bitcoin may reach next, five and ten years later.
When you get your first job on Wall Street, they will tell you that the four most expensive words in the financial industry are “It’s different this time.”
Historically, whenever we see this global economic panic, cryptocurrencies will initially fall but will rise in the following year.Maybe this time is really different, but I dare not bet.In fact, I bet in the opposite direction.
