The past few days in crypto markets have been nothing short of a whirlwind. Following concerns around whether the Fed could be behind the curve in cutting interest rates triggered by weak jobs data last week, rising geopolitical tensions in the Middle East, uncertainties about the result of the November presidential election, the Bank of Japan interest rate rise to strengthen the JPY but also making the Yen carry trade less favorable was the latest headwind for risk assets.
The Nikkei 225 dropped 12.5% on Monday, the sharpest daily drop since Black Monday in 1987. The sell-off reverberated to broader risk assets as the VIX reached its third-highest print, all stocks of the Dow 30 average were in the red, the 10-year yield touched 3.782%, and the market is now giving 74% odds of a 50 basis point interest rate on the next FOMC meeting next September 18.
Crypto, of course, fell in tandem with risk assets more broadly..
The chart below shows the minute-by-minute price action, volumes, and price dispersion across exchanges for some of the main BTC pairs. Although the market was already heavy over the past few days due to many of the factors mentioned above, the drop from the $58k level to under $50k almost coincides with the trading hours of the Japanese market, which are highlighted below.
The drop was concentrated in two relatively short bouts, one after the Japanese market open and another around the market close. Price dispersion across exchanges topped 1.7% and 1.0% in each of these bouts, which is a high level for a liquid asset like BTC and suggesting that some forced selling exacerbated the negative price action.
Case in point, long liquidations in BTC and ETH perpetual futures totalled $528 million, the highest print since August 2023.
The market started to recover during US trading hours, and for now has stablizied around $55k price range. Japanese equities rose 10% on Tuesday and U.S. equities are also pointing to a positive trading session today are supporting the partial recovery.
Volumes were relatively timid on Sunday given the magnitude of the sell-off, but overcompensated on Monday. BTC spot and futures on Sunday clocked in at $11.9 billion and $59.1 billion, respectively. For context, these figures are somewhat average for a July weekday and not very different from the activity recorded the previous Saturday when Donald Trump spoke at Bitcoin Nashville 2024. Monday’s volumes, however, stood at $45.2 billion and $192.6 billion, respectively, the second-highest and highest prints on record respectively.
The fact that the recovery was underpinned by exceptionally strong volumes is encouraging. Especially given that, contrary to the last correction when strong U.S. spot BTC net inflows came in during the sell-off, ETF flows this time were negative.
Orderbook dynamics also showed a similar trend. My favorite metric of market depth (1% level) did not change significantly in absolute terms, but the skew between buy and sell orders sitting in the book abruptly changed and suggested relative buying pressure coming in.
Sell pressure in the book has been accumulating in the orderbook to the point of reaching the yellow-flag level of 1.25x of buy orders, but during the sell-off this selling pressure was exhausted relatively quickly to the point that the orderbook now is skewed to the buy side.
This is another instance of how the market was able to accommodate selling pressure concerns exceptionally well, similar to what we highlighted a few weeks ago on the back of German Government selling concerns.
We saw a similar trend at our desks. Pretty much all investor personas were net buyers yesterday, including prop desks (57% of total flow on the buy side), hedge funds (63%), venture funds (61%), and retail aggregators (72%). Interest in BTC remained elevated as the largest cryptoasset traded 2.8x more than ETH. Majors also continue to gather more activity than alts, with BTC and ETH trading more than double of alts.
Buy/Sell ratios, which were skewed toward the sell side over the past week became skewed the buy side today.
Over the next few days, focus will likely shift to whether Sunday’s high-volatiilty event generated any casualties who were caught wrong footed, whether in crypto or in the broader market, that usually take a few days to surface.
The market is still facing many different cross currents in the short term. It is possible that realized volatility in the short term will remain in relatively elevated versus the historically low levels it’s been for most of 2024, but most many investors would be justified in keeping their bullishness.
But medium- and long-term oriented investors have more than just liquidity trends to be excited about. Macroeconomic shocks can signal the beginning of Bitcoin bull markets, not the end. This is especially the case for Bitcoin, which was created exactly to fix the types of cracks in our current monetary architecture that events like this exposes.
