Massive Crash in the Cryptocurrency Market – What Actually Happened?

Bitcoin and the entire cryptocurrency market plunged into a strong price correction over the past weekend. The cryptocurrency market experienced its biggest three-day sell-off in over a year, losing more than $500 billion of its market capitalization since Friday. Bitcoin has fallen as much as 25% in recent days, according to data from the Coinmarketcap website, while Ethereum has seen losses of up to 32%. What actually happened?

Unexpected Move by the Bank of Japan

The Japanese yen has become an unexpected focus of attention over the past week due to surprising moves by the Bank of Japan (BOJ). The BOJ surprised the market last Tuesday by raising interest rates by 0.15% to the 0.25% band, taking Japan’s benchmark rate to its highest level in 15 years. One of the main factors prompting this rate hike was the prolonged depreciation of the yen, which has pushed inflation in Japan up to 2.8%. This decision caused significant movements in both the foreign exchange and stock markets in Japan.

Japan’s Nikkei index has lost as much as 19% of its value over the past 5 days, recording its worst trading day since the infamous ‘Black Monday’ of 1987 on Friday. The uncertainty has gradually spread to other stock markets, with the S&P 500 Index losing almost 4% and the Nasdaq Technology Index losing almost 5%. This sell-off in the stock market correlated with the slump in the cryptocurrency market, where Bitcoin and several altcoins saw losses in the tens of percentages.

Is the U.S. at Risk of Recession?

The weekend’s decline in the stock and cryptocurrency markets was partly linked to disappointing earnings results from U.S. companies, with firms such as Amazon and Intel reporting weaker-than-expected results in the second quarter. Markets were also significantly affected by data from the U.S. labor market, which showed that job growth slowed much more than expected during July, with unemployment rising more than analysts had forecast. This information sparked fears among investors that the Federal Reserve might have made a mistake last week by leaving interest rates unchanged, raising concerns that the economy may be heading into a recession.

Investors are now betting that the Fed will have to cut interest rates by at least 0.25% at its next meeting. Speculation is also increasingly circulating on social media about a possible 0.5% rate cut to boost the economy and restart economic growth. There is also growing speculation that the Fed is planning to call an emergency meeting later this week to cut rates on an emergency basis.

Lower interest rates are generally good for both the stock and cryptocurrency markets, as borrowing becomes cheaper and more capital flows into the market during periods of low interest rates. Lower rates tend to correlate with better performance in risk assets, which clearly includes Bitcoin.

Conflict Between Israel and Iran Affects Markets

The recent escalating tensions between Iran and Israel have had a significant negative impact on the cryptocurrency market. After Iran attacked Israel with drones and missiles over the weekend, cryptocurrency prices fell significantly, with Bitcoin down over 20% in the last 7 days and other major cryptocurrencies such as Ethereum and Solana experiencing similar losses. This conflict has increased geopolitical tensions and uncertainty, which traditionally leads investors to move away from riskier assets such as cryptocurrencies and into safer investments.

This uncertainty has caused massive sell-offs and liquidations, with more than $1.5 billion worth of positions liquidated since the beginning of August, according to Coinglass. Therefore, the tensions in the region and their possible further developments remain a key factor affecting the cryptocurrency market in the short term.

Market Uncertainty – An Opportunity to Buy?

The Cryptocurrency Fear & Greed Index plunged 26 points from 100 on Sunday night to Monday, dropping from the greed to the fear area over the past five days. The last time this index was at the same level was in mid-July when Bitcoin briefly fell to $53 thousand. However, in the last instance, this level of the index proved to be a great entry point for investors, as over the next few days, Bitcoin rose as high as 17 thousand dollars and tested the 70 thousand dollar price level.

Source: Crypto Fear & Greed Index

Bitcoin Rainbow Chart

According to the “Bitcoin Rainbow Chart,” which tracks Bitcoin’s long-term price trends, its price has re-entered the band in which it is recommended to buy based on historical data. This indicator, popular among long-term investors, suggests that Bitcoin is currently undervalued compared to its long-term trend value. The last time Bitcoin was in this zone was in early 2023, which was followed by a significant surge that led to a new all-time high. This pattern has been repeated in previous cycles, with a significant price increase following a halving, followed by a profit-taking phase.

Source: Bitcoin Rainbow Chart

What Do the Fumbi Experts Advise?

During market downturns, it is important to remember that the loss is only realized when you actually withdraw your funds. This means that unless you sell your investments, your losses are not final. Periods of downturn can be beneficial for buying up cryptocurrencies to strengthen your long-term investment strategy. It’s an opportunity to improve and diversify your portfolio. For more information on how to manage losses, you can read our blog. To learn more about the benefits of regular investing, also visit our blog.