Tide Capital: Market Flash Crash Ends, BTC Builds Bottom and Recovers
Abstract
- With the rapid unwinding of yen carry trades, the global capital market flash crash has ended, and the market is expected to gradually build a bottom and recover.
- The crypto market has completed a deep adjustment following the U.S. stock market, with institutional investors buying at lows. BTC is expected to continue outperforming altcoins.
- We are optimistic about BTC’s gradual rise, but due to the ongoing uncertainty surrounding the U.S. presidential election, there may be a pattern of initial decline followed by recovery.
Short-Term Shock Ends, Market Finds Bottom and Recovers
Yen Carry Trade Unwinding Ends, Market Liquidity Panic Mostly Eased
On August 5, Japanese stocks plunged about 12%, leading to a global stock market decline and a significant increase in market volatility. In the following four trading days, global stock indices rebounded, effectively recovering the initial week’s losses. Concerns had previously centered around the potential global liquidity crisis triggered by the unwinding of massive yen carry trade positions, similar to the liquidity crisis of March 2020. However, the panic over market liquidity has largely subsided, with market volatility significantly reduced.
Firstly, the impact of the reversal in highly crowded trades has mostly ended. The market volatility was more like the result of unwinding high-crowded strategies such as shorting yen and going long on stocks. Currently, the short positions in yen held by highly leveraged funds have rapidly decreased, reaching the lowest level of the year, and the unwinding of yen carry trades is essentially complete.
Secondly, liquidity risks have not spread further. Indicators of global liquidity, such as the currency swap basis between yen and dollars, have not continued to rise, and assets like gold and U.S. Treasuries have not experienced significant declines. Financial institutions have not been significantly impacted by this market volatility, which is a notable difference from March 2020. The VIX index, which spiked to 65, has now fallen to around 15, indicating that market panic has largely eased.
Strong July Retail Sales Data Eases U.S. Recession Concerns
The recent decline was also influenced by recession concerns in the U.S. Nonfarm payrolls for July dropped sharply to 114,000, and the unemployment rate rose unexpectedly to 4.3%, triggering the “Sam Rule” recession threshold. According to the “Sam Rule”, if the unemployment rate (based on a three-month moving average) rises by 0.5 percentage points from its low point of the previous year, a recession is considered to have begun. This indicator has a 100% accuracy rate since 1970, leading to increased market concerns about a recession.
However, single-month data may be noise, and the market has struggled to find further confirmation of a recession. The number of initial jobless claims dropped to 233,000 last week, and further decreased to 227,000 this week, surpassing expectations. Additionally, U.S. retail sales for July were robust, at 1%, well above the expected 0.3%. The alleviation of recession concerns led to a significant rise in U.S. stocks. Given the current situation, it is too early to declare that the U.S. economy is in a recession.
The global market downturn was mainly triggered by the unwinding of yen carry trades and U.S. recession trades. In fact, the macroeconomic environment has not changed significantly, and the U.S. economy remains strong, making it difficult for the downward trend to continue. As of now, the short-term shock has largely ended, and the market is expected to recover after a period of fluctuation.
Cryptocurrency Market Completes Deep Adjustment, Likely to Rise Gradually
BTC Follows Global Financial Market De-leveraging, Completes Healthy Adjustment
Comparing the price of BTC with Nasdaq 100 futures, we see that their movements are closely aligned. Due to short-term liquidity shocks and market panic, BTC also faced substantial sell-offs. Within a week, BTC dropped from $70,000 to $50,000, a decline of nearly 30%. Subsequently, as market sentiment improved, BTC rebounded from its low, and is currently experiencing range-bound fluctuations.
This wave of decline in the cryptocurrency market was primarily caused by global capital market de-leveraging rather than issues inherent to the crypto market itself. The rapid de-leveraging process has mostly concluded, and the market is more likely to move upwards rather than downwards. Futures data shows that the open interest in BTC contracts has decreased from $37.5 billion to $30.0 billion. A large number of leveraged long positions have been liquidated, helping the market complete a healthy adjustment.
Stablecoins See Net Inflows, Institutions Buying at Lows
Over the past month, the total amount of stablecoins has increased from $171.2 billion to $173.6 billion, a net increase of $2.4 billion. Despite the continued market declines, the total amount of stablecoins has not decreased but has instead risen rapidly. After the crash on August 5, institutional investors began buying at lower prices, with well-known market maker Cumberland accumulating over 1.5 billion USDT from Tether Treasury and moving them to major exchanges.
With the approaching interest rate cut in September, the market expects funding costs to decrease gradually. In the U.S. Treasury market, the 10-year Treasury yield has rapidly fallen to 3.88%, and the 1-year Treasury yield has quickly dropped to 4.50%. The decline in Treasury yields supports further inflows into the cryptocurrency market, boosting the total amount of stablecoins.
Bitcoin Market Share Continues to Rise, Altcoins Still Being Cleared
Since July, Bitcoin’s market share has risen from 54% to 57%, with BTC continuing to outperform most other tokens. Market hotspots are fewer, and the profitability effect is poor. The trend of altcoins being cleared continues, making BTC the investment choice of preference.
On-chain data shows that activity levels have further decreased. The combined daily transaction fees of Ethereum and Solana have fallen to $2 to $3 million, similar to the levels seen in the bear market of the second half of last year.
Overall, although BTC is still in an uptrend this year, most altcoins have experienced a one-sided decline. Funds are flowing almost entirely into BTC, raising questions about the investment value of altcoins. In the absence of innovation and on-chain activity, the downward trend in altcoins is hard to reverse. We believe that a new altcoin bull market may only begin after BTC breaks new highs and high-risk funds enter the market.
U.S. Election Uncertainty May Cause Market to Decline First and Rise Later
The U.S. election has become a significant narrative in the cryptocurrency space, capable of influencing market trends. Polymarket data shows that Kamala Harris’s chance of winning overtook that of Donald Trump on August 10 and currently stands at 54%. Although Harris has gained ground, the probability of Trump winning is also close, making either Harris or Trump a potential new president. Therefore, the U.S. election remains uncertain and will impact market trends over the next two months.
Historically, markets dislike uncertainty, often declining before an election. After the election results are out, markets typically recover and rise. For example, in 2020, both U.S. stocks and BTC began to decline in September. It was only after the November election results were settled that markets surged, with BTC and U.S. stocks reaching new all-time highs.
Therefore, before the U.S. election in November this year, the market may experience a pattern of initial decline followed by recovery. Whether Harris or Trump is ultimately elected, it is likely that the U.S. government will continue the money printing path, which will drive up both U.S. stocks and the cryptocurrency market.
Conclusion
The liquidity flash crash has ended, and both U.S. and Japanese stocks are building a bottom and recovering. We are optimistic about BTC’s gradual rise.
Tide Capital
Tide Capital is a research-driven digital asset investment and trading firm. We study macro and fundamentals to capture beta and alpha opportunities from crypto waves to financial tides. Driven by value, we aim to invest in early-stage projects with significant growth potential. Concurrently, we assess market cycles to inform our investment decisions, trading in the public market to achieve returns.
website: tidecap.com
mail: info@tidecap.com
twitter: twitter.com/tidecap
medium: tidecap.medium.com
Disclaimer
The information and data presented in this article are obtained from public sources, and Tide Capital makes no guarantees regarding their accuracy and completeness. Any predictions, speculations, or opinions contained in this article are statements about future events and may differ significantly from actual results due to limitations in data timeliness, assumption validity, uncertainty factors, and unforeseeable risks. Any advice and opinions in this article are for reference purposes only and do not constitute recommendations to buy or sell any digital assets. They do not constitute investment advice or solicitations. The strategies that Tide Capital may adopt may be the same, different, or unrelated to those inferred by readers based on this article. Investors should carefully consider any decisions and seek appropriate legal and financial advice when necessary. Any misunderstanding or misuse of the content in this article does not constitute the responsibility of the author or the publishing institution.