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Hi, Maciej Ownetman here. Today we're going to take a deep dive into the events of the past week in the cryptocurrency world (through 08/08/2024), combining them with the current geopolitical turmoil to uncover the full picture. This perspective helps us stay ahead of events. If you prefer to listen, this analysis is also available in the form of a podcast. We release these summaries once a week - usually on Thursday evening. Subscribe to us on YouTube so you don't miss future episodes. By staying on the headphones until the end of the podcast - you stay one step ahead of the market. And now, let's get started!
Two weeks ago we called our episode "The Big Week," reflecting its significant impact on the history of cryptocurrencies. This period was full of important events, including speeches by Donald Trump, the potential future president of the United States, at a conference in Nashville, and the start of spot trading in Ethereum ETFs. (Source:"Trump's Speech at Bitcoin Conference Will Mark a Pivotal Moment for Crypto").
Trump's statements at the Consensus 2024 event in Nashville were seen as a change in his stance on cryptocurrencies. The former president, who had previously stated that he was "not a fan" of cryptocurrencies, announced that if elected he would pardon Rosss Ulbricht, founder of dark-market Silk Road. The surprise move was interpreted as a sign of growing political support for the cryptocurrency industry (source:"Trump pledges to commute sentence of Silk Road founder Ross Ulbricht").
The launch of the first Ethereum spot ETFs on July 23 was another significant milestone. After a decade-long battle with the SEC, the approval of these ETFs marked a major victory for the cryptocurrency community. The ETFs provide a regulated and accessible way for institutional and retail investors to gain exposure to Ethereum without owning the cryptocurrency directly (source:"What's Next for Ethereum ETFs Following SEC Approval?").
Now, two weeks later, we reflect on a tumultuous period - not the bloodiest, but definitely a bloody week in both the cryptocurrency markets and the stock market. As predicted, the "sell the news" effect after hopes of a "Big Week" proved difficult to realize. Despite high expectations, the actual market reaction was subdued, leading us to wonder what else might have been said to spark a wave of optimism (source: Trump calls for US to be 'crypto capital of the planet' in appeal to Nashville).
Stay tuned as we delve into the intricacies of market trends and their implications, always keeping an eye on the availability and functionality of cryptocurrencies through platforms such as Bitcoin ATMs provided by Bitcoin ATM.
Initially, after a significant week known as "Holy Week," the markets seemed stable without significant declines. However, this stability was short-lived, as steep declines soon followed, casting a shadow of intense fear over investors (source: Crypto Market Update: Q2 2024 in Review)
This pervasive fear is partly due to the fact that the declines were driven by broader trends in global equity markets, reflecting the sensitive interdependence between cryptocurrency markets and global financial indices. The Nasdaq, in particular, experienced its worst day since late 2022, coinciding with the drop in Ethereum prices (source: Crypto Market Update: Q2 2024 in Review).
The launch of Ethereum ETFs was expected to attract significant inflows and potentially lift the ETH price to new highs. However, the actual impact was more muted than expected. On the first day of trading, the ETFs only attracted a net $107 million, which was only 16% of the $655 million that the Bitcoin ETFs attracted on their debut day.
In addition, the Grayscale Ethereum Trust (ETHE) saw large outflows of $484 million on the first day of ETF trading as investors realized their holdings in GETH. This selling pressure may have offset buying demand from the new ETFs, contributing to the decline in ETH prices (source: "Ethereum ETFs will have a bigger impact on ETH price: Bitwise").
Despite the initial disappointment, analysts remain optimistic that ETFs on Ethereum will have a positive impact on the price of the cryptocurrency in the long term. VanEck, one of the ETF startups, raised its price forecast for Ethereum to $22,000 by 2030 (source:"First Bitcoin and now ETH ETFs: Where is the market headed next?").
Several factors contributed to the downward trend in the cryptocurrency markets after the events of "Holy Week."
The launch of Ethereum ETFs may have triggered a classic "sell-the-news" event, where investors sell their ETH holdings to realize profits after a long-awaited approval
More than $94 million in long ETH positions were liquidated within 24 hours after the ETFs were launched, indicating that traders betting on rising ETH prices were pushed out.
The drop in ETH prices coincided with broader declines in U.S. and European stock markets, suggesting that macroeconomic factors were also affecting ETH.
Some analysts say Ethereum's fundamentals were stagnant or declining, making it more susceptible to selling pressure compared to Bitcoin.
Ongoing withdrawals and distributions from Mt. Gox may also affect the market, as creditors sell recovered bitcoin and ether (Source: Ethereum ETFs Launched - Why is ETH's Price Dropping?)
Despite these short-term challenges, the long-term outlook for Ethereum remains positive. The success of the launch of spot ETFs is a significant milestone that will likely attract more institutional and retail investors to the cryptocurrency.
In addition, Ethereum's technological advancements, such as the upcoming Shanghai update that will allow stakers to withdraw their ETH, are expected to drive further adoption and price increases.
Despite initial disappointment, analysts remain optimistic that ETFs on Ethereum will have a positive impact on the price of the cryptocurrency in the long term. VanEck, one of the ETF start-ups, raised its price forecast for Ethereum to $22,000 by 2030 (source: First Bitcoin and now ETH ETFs: Where is the market headed next?).
To better understand current market dynamics, it is crucial to understand the economic principles influencing these changes, particularly the carry trade strategy. This financial strategy, which involves taking advantage of interest rate differentials between two central banks of stable countries, significantly affects investment strategies, including those related to cryptocurrencies such as Bitcoin, available through Bitcoin ATM Bitcoin ATM.
The carry trade strategy is often seen as an advanced strategy used mainly by institutional investors and not the average retail investor. This is due to its complexity and the inherent risks associated with the strategy. By borrowing in a currency with a low interest rate and investing in assets with higher yields, investors can increase their returns. For example, the carry trade has historically been successful between countries such as the United States and Japan, where economic stability and predictable monetary policies create favorable conditions for such transactions (source: The Risk and Return of Cryptocurrency Carry Trade)
To illustrate this with an example, let's consider our hypothetical investor, Kowalski, who uses $10,000 through brokers or banks to maximize profits based on international interest rate differentials. By borrowing in Japanese yen, whose interest rates have been near zero since the Bank of Japan's aggressive monetary easing in 2008, Kowalski can effectively secure a loan with zero interest (source: How One Fund Used the Carry Trade to Beat Bitcoin).
After obtaining this loan, Smith converts the yen to U.S. dollars at an exchange rate of 160 yen per dollar, which yields about 1.6 million yen, or the equivalent of 10,000 U.S. dollars. This conversion illustrates the essence of the carry trade strategy - borrowing in a currency with a low interest rate to invest in an asset with higher yields.
Smith then directs those funds into U.S. bonds, which currently yield about 5.5%, reflecting current interest rates in the United States. This scenario highlights the potential of the carry trade: using global economic policies to secure higher returns while navigating the complexities of taxation and fees. The interconnectedness of global finance is evident, as fluctuations in currency values and interest rates can significantly affect investment strategies, including those in the emerging area of cryptocurrencies (source: Crypto carry, Bank for International Settlements).
The impact of carry trade strategies extends beyond traditional assets to include cryptocurrencies. As institutional investors increasingly adopt carry trade strategies, the dynamics of the cryptocurrency market are changing. For example, the dismantling of the carry trade can lead to significant price volatility for cryptocurrencies such as Bitcoin and Ethereum. Recent trends show that Bitcoin has fallen significantly against the Japanese yen, a phenomenon driven by the dismantling of these carry trades as the yen strengthens against the dollar. This underscores the sensitivity of the cryptocurrency market to broader financial trends and investor behavior (source: What is a carry trade and its importance for the cryptocurrency market).
In addition, the rise of the carry trade in cryptocurrencies has introduced new opportunities and risks. Recent research indicates that the cryptocurrency carry trade can yield significant returns, similar to traditional carry trades, but with higher volatility and risk profiles. The potential for high returns attracts sophisticated investors, but the lack of regulation and inherent risks of the cryptocurrency market can lead to unexpected outcomes, including sharp price declines during periods of market correction.
Kowalski's hypothetical scenario continues as he uses his initial $10,000 to obtain a similar line of credit or engage in leverage - this time choosing to borrow in Japanese yen instead of US dollars. This strategic choice takes advantage of Japan's near-zero interest rates, allowing Kowalski to borrow efficiently without incurring significant costs (source: Cryptocurrency prices soar: Bitcoin-Ethereum and others recover).
After securing a loan in yen, Kowalski converts these funds to dollars, illustrating the mechanics of the carry trade - borrowing in a low interest rate currency to invest in assets with higher returns. By investing in U.S. bonds yielding 5.5%, Kowalski shows how investors can exploit differences in global economic policies to secure higher returns.
While the carry trade can offer lucrative returns, it is not without risks. The main problem is exchange rate uncertainty; if the value of the funding currency fluctuates unfavorably, it can lead to significant losses. For example, during the 2008 financial crisis, the dismantling of the yen carry trade led to a sharp appreciation of the yen, resulting in significant losses for traders who leveraged their positions.
In the cryptocurrency space, these risks are compounded because of the inherent volatility of digital assets. The potential for rapid price fluctuations means that while the carry trade can yield high returns, it can also expose investors to significant losses. Understanding the broader economic landscape and the interplay between traditional financial markets and cryptocurrencies is crucial for investors who want to navigate this complex environment.
When all variables work in favor, the carry trade can be very profitable. By borrowing money at zero interest from Japan and investing in higher-interest U.S. bonds, an investor effectively earns interest on double the principal, about 5.5% on each half, for an annual return of about 11%. This scenario assumes no exchange rate fluctuations or sudden changes in the economic policies of the countries involved. Under these stable conditions, the investor not only secures a solid return, but potentially outperforms the broader US market indexes.
However, the delicate balance of the carry trade can change quickly. For example, the Bank of Japan, which had maintained zero interest rates since 2008, has decided to raise them to 0.25%. While this increase seems small, it represents a significant change for strategies relying on historically low interest rates in Japan. This change affects the attractiveness of the yen, increasing its demand and potentially changing the dynamics of many carry trades.
The natural market reaction to an interest rate hike is to increase demand for the currency, making the yen more expensive and affecting previously favorable carry trade conditions. This scenario illustrates the inherent risks of global economic interdependence and underscores the volatile nature of financial markets, which can affect even seemingly safe investment strategies. Such insights are crucial for cryptocurrency investors using platforms such as Bitcoin ATM, to understand the broader financial ecosystem that can affect their cryptocurrency investments.
When a central bank raises interest rates, one of the immediate effects is to strengthen that country's currency. For example, after the Bank of Japan raised interest rates, the value of the yen rose against the dollar. This change adjusted the exchange rate from 160 yen per dollar to 146 yen per dollar, making the yen more expensive and changing the financial dynamics of carry trades that relied on a weaker yen.
Assuming that the investor keeps the same U.S. bonds yielding 5.5% per year, but now has to repay the loan at the new interest rate of 0.25% plus an unfavorable exchange rate differential, the bottom line changes dramatically. The loan was originally valued at 1.6 million yen, equivalent to $10,000. With the new exchange rate, this amount converts back to only $10,986, taking into account the additional 4,000 yen required due to the exchange rate change.
Despite still earning 11% on $20,000, which would normally yield $2,200, adjusted profit margins due to changed interest rates and exchange rates reduce the effective annual return from 11% to about 1.1%. This drastic drop in profitability shows the sensitivity of the carry trade to even small fluctuations in economic indicators such as interest rates and exchange rates. This scenario, while currently stable due to the conservative nature of bond investments, underscores the importance of staying abreast of global financial trends, especially for cryptocurrency investors who may experience similar volatility in digital asset markets accessible through platforms such as Bitcoin ATM.
While some investors choose the relative safety of bonds in a carry trade scenario, others enter the stock market, believing it offers better returns than the bond market. This shift often involves the purchase of riskier assets. When the value of the dollar against the Japanese yen fluctuates with the size of yen loan repayments, investors find themselves in a situation where they need to increase the collateral in deposit accounts. This necessity can lead to forced sales of various assets, including stocks and potentially spot ETFs on Bitcoin or Ethereum (source: The domino effect, rare events and suede shoes - Values).
When these investors sell assets to meet margin requirements, this action can have a domino effect on the entire market. The "interconnected vessels" mechanism means that if one investor's stock falls and he starts selling his holdings, including cryptocurrencies, to cover other positions, this can prompt others to do the same. This chain of reactions can lead to significant, aggressive market declines (source: Cryptocurrency prices soar: Bitcoin-Ethereum and others recover).
It is difficult to predict whether these declines have already ended, since the full extent of leverage and related positions is not always transparent and may not be fully reported. The theoretical range of such declines is almost unlimited, but practical limits probably exist. After the initial shock of those difficult days, the market began to react and stabilize somewhat (source: What are the examples?).
What lessons can be learned from these turbulent times, and what actions can we consider in the coming days and weeks? The scenario remains as volatile as it was in the early days of Ethereum trading, which mirrored the patterns seen in Bitcoin trading. Moving forward, understanding the mechanics of these market movements and how they affect various investment instruments - including those related to cryptocurrencies available through platforms such as the Bitcoin ATM - is becoming crucial. Investors must remain vigilant in keeping track of global financial movements and their potential impact on even the best-laid plans.
While Grayscale continues its Ethereum sales cycle, these assets are being transferred to other Ethereum spot ETFs. Observations indicate that once Grayscale completes its sales, which is expected to happen within two to three weeks of recording this analysis, this could potentially unlock an uptrend for Ethereum. For example, on the Tuesday before this discussion, ETFs on Ethereum saw inflows of about $48 million, clearly influenced by post-Grayscale selling.
In contrast, ETFs on Bitcoin experienced a significant outflow of $168 million over the same period. This significant shift coincided with a 3.5% decline in the Ethereum to Bitcoin price ratio, suggesting larger inflows into Ethereum ETFs relative to their market capitalization.
This pattern suggests a broader shift in strategy among conventional and Wall Street investors, who appear to be redirecting funds away from Bitcoin to a dual holding strategy involving both Bitcoin and Ethereum. However, the current trend indicates a gradual shift away from Ethereum toward Bitcoin. Nevertheless, from a broader perspective, there is a strong belief in the market that Ethereum will soon regain and even surpass its position relative to Bitcoin, which could usher in an "alt season" driven by Ethereum's growing dominance.
This ongoing narrative in the market suggests a potential reversal of fortune in favor of Ethereum relative to Bitcoin by the end of this year. While many expect this shift, the recurring nature of this market sentiment may either solidify as a self-fulfilling prophecy or fail to materialize, with Bitcoin maintaining its dominance of the market (source: First Bitcoin and now ETH ETFs: Where is the market headed next?).
As the cryptocurrency landscape continues to evolve, the interaction between the movements of ETFs and direct cryptocurrency investments remains crucial. For investors using platforms such as Bitcoin ATM, understanding these dynamics can provide valuable insights into when and where to effectively place investments.
Recent fluctuations in the U.S. unemployment rate - from a projected 4.1% to 4.3% - have raised concerns, although I believe the market has not overreacted to the changes. It is unlikely that such a marginal increase in unemployment could be the sole cause of significant declines, such as potentially the worst day in the history of the Japanese stock market (source: Bitcoin and ethereum down sharply. Cryptocurrency market in crisis). Such a scenario seems highly unlikely, suggesting that other factors could also affect market sentiment.
The current macroeconomic environment remains complicated, with growing unrest in some European countries and the Middle East. These geopolitical events could have far-reaching implications for global markets, including cryptocurrencies. Closely monitoring these situations will be key to understanding broader market movements.
I encourage you to follow these developments by keeping an eye on my Twitter feed, where I regularly post insights and updates. Keeping up to date with information from a variety of sources can help you navigate these uncertain times more effectively.
That's all for today from my side. If the current market situation seems stressful, I recommend taking a walk to clear your mind and keep faith in the long-term growth of your favorite projects. Remember, staying calm and focused is key during turbulent periods in the market.
Thank you and until next time, goodbye.
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