Why Did Bitcoin Crash 25%? Unraveling the August 5th Market Meltdown"

On August 5, 2024, the crypto market faced its worst crash since the 2022 collapse of FTX and Terraform Labs, as both BTC and ETH plunged 25% in a single day.

However, the story behind this crash is even more fascinating.

You must have heard about the butterfly effect. This concept from chaos theory suggests that even the smallest events can have seismic and life-changing ripple effects.

While none of the events are exactly “small,” it is still fascinating to see how they all came together seemingly at once.

Here is an overview of all the events:

• Japanese Yen carry trade fails

• Jump Crypto dumping ETH

• Taiwan market crashes

• Trump’s winning odds are decreasing.

The Yen Carry Trade Debacle

Here is a Tl;Dr.

Japan's Yen carry trade collapse sent shockwaves through global markets, wreaking havoc on Japan's stock market, US tech stocks, and cryptocurrencies. 

Before we go any further, here is a short timeline of the events.

• Mid-July 2024: The Japanese yen surged nearly 7% against the US dollar, forcing traders to begin liquidating their carry trade positions.

• July 31, 2024: The BoJ raised interest rates on short-term government bonds from 0% to 0.25%, signaling a shift in monetary policy. The yen appreciated sharply in response.

• August 1-4, 2024: The USD/JPY exchange rate plummeted from 153 yen per dollar to 145, increasing the cost of yen-denominated loans and triggering widespread sell-offs.

• August 5, 2024: Japan’s stock market experienced its worst day in 37 years, with the Nikkei 225 plunging 12%. In turn, the Nasdaq dropped 6% and both BTC and ETH dropped by around 25%

Alright, let’s dive deep.

July 31: The Yen Carry Trade Begins To Crumble

The yen carry trade is a financial strategy where investors borrow Japanese yen at very low interest rates and then use the borrowed funds to invest in higher-yielding assets, such as foreign bonds or stocks. 

The goal is to profit from the difference between the low cost of borrowing in yen and the higher returns from these investments. 

But here is the kicker.

What happens if the Yen suddenly climbs up in value?

In that case, the cost of repaying the yen-denominated loan can increase, potentially leading to losses and market disruptions.

On July 31. 2024, the Bank of Japan (BoJ), hiked its interest rate from 0% to 0.25%. There were two reasons for doing this:

• BoJ believed that the domestic economy is recovering post-Covid.

• They were concerned about the Yen being weak.

The rate hike boosted Yen’s price to new heights.

Unfortunately, it wrecked all the carry trades, leading to margin calls for investors who had borrowed yen. To cover their positions, investors were forced to liquidate assets, causing a sell-off in global markets.

August 1- August 4: US Tech Stocks Crumble

The unwinding of the yen carry trade had far-reaching consequences, particularly for US tech stocks. The relationship between the yen carry trade and U.S. tech stocks is deeply intertwined, as the former has been a key driver of investment flows into the latter.

However, as the yen began to strengthen following the BoJ’s policy shift, the cost of these borrowed funds increased dramatically. This prompted investors to unwind their carry trade positions, leading to a significant sell-off in US tech stocks. The tech-heavy Nasdaq index, which had been riding high on the back of strong earnings and investor optimism, suddenly found itself in freefall.

On August 5, 2024, the Nasdaq dropped over 6%, marking one of its worst days in years. The S&P 500 also dipped by 4.25%, as fears of a broader market slowdown began to take hold. The sell-off in U.S. tech stocks was exacerbated by the fact that many investors had leveraged their positions, amplifying the losses as they were forced to liquidate their holdings to cover the rising costs of their yen-denominated loans.

The broader macroeconomic environment further complicated the situation. The US Federal Reserve’s signals of potential interest rate cuts later in the year added to the uncertainty, as investors grappled with the possibility of slowing economic growth and the impact it could have on tech stocks.

August 5: Crypto Comes Crashing Down

In recent years, the correlation between tech stocks and cryptocurrencies, particularly Bitcoin, has grown significantly. Bitcoin, which was once viewed as an uncorrelated asset, has increasingly been seen as a growth asset, similar to tech equities.

The approval of Bitcoin ETFs in 2024 had brought a new wave of institutional investors into the crypto market, further blurring the lines between traditional equities and digital assets. 

This growing correlation meant that as the US tech stocks plummeted, so too did cryptocurrencies.

On August 5, 2024, Bitcoin, which had been trading close to its all-time high just weeks earlier, plummeted below $50,000. Ethereum and other altcoins saw even steeper declines, with some losing more than 26% of their value in a matter of days. 

Jump Crypto Dumping Crypto

Jump Crypto, the cryptocurrency arm of Jump Trading, has recently dumped large amounts of Ether. They transferred around $277 million worth of ETH to various exchanges, including Binance, OKX, Coinbase, Bybit, and Gate .io.

This aggressive sell-off is believed to be either a response to margin calls in traditional markets or part of a broader strategy to wind down its crypto operations amid regulatory scrutiny.

So, why did Jump dump its coins? There are several reasons:

• Jump Trading likely borrowed yen for high-frequency trading, but as the yen surged against the USD, their USD-denominated loans became more expensive, possibly triggering margin calls.

• Jump Crypto has faced major losses, including a $325 million loss from the Wormhole hack in 2022 and exposure to the FTX collapse. 

• The ongoing CFTC investigation into Jump Crypto’s trading activities.

Also, Jump Trading isn’t the only big firm dumping ETH. As per DeFi Mochi, Grayscale and Paradigm have also been liquidating their Ether positions.

The sell-off has added pressure to an already unstable market, contributing to a sharp drop in crypto prices.

Taiwan Faces Worst Market Crash In 57 Years

Taiwan’s stock market experienced a historic crash, with the Taiex index plunging 8.4%—its worst drop since 1967. The selloff was led by Taiwan Semiconductor Manufacturing Co. (TSMC), which saw its stock plummet 9.8%, a record one-day decline. 

This sharp downturn was triggered by fears of a U.S. economic slowdown, leading to a broader selloff across tech-heavy markets in Asia. TSMC, along with other major Taiwanese tech stocks like Mediatek, Quanta, and Foxconn, faced significant losses, each approaching the daily limit of a 10% decline.

Taiwan’s Finance Ministry and stock exchange officials have indicated they will monitor the situation closely and may implement stability measures if necessary. Despite the turmoil, some analysts believe TSMC's fundamentals remain strong, though market volatility is expected to continue in the coming days.

However, there are fears that a potential U.S. recession can severely impact export-reliant economies like Taiwan, South Korea, and Japan. This crash further added to the overall negative market sentiment.

Trump’s Winning Odds Decreasing

Donald Trump's election has long been linked to the crypto market, with his pro-crypto stance contrasting Biden's historically anti-crypto approach. Trump’s lead in the polls had been favorable for the crypto ecosystem. 

However, with Kamala Harris now in the race and leading Trump in three key swing states—Wisconsin, Pennsylvania, and Michigan—the odds have shifted. According to Polymarket, Harris now has a 51-46 advantage over Trump. 

This shift in election odds may be contributing to a sense of FUD in the crypto market.

Conclusion

Since the collapse, the price recovered pretty spectacularly, with BTC trading above $60,000 again.

As markets stabilize, the lessons from this event will likely influence future monetary policies and investment strategies, underscoring the importance of vigilance in a complex global economy.