The crypto market crashed late Sunday and the worst may not be over.
The crypto market started to melt down at about 8 p.m. ET on Sunday and has yet to recover. As of 11:30 a.m. ET on Monday, Bitcoin (BTC -0.06%) is down 8.3% in the last 24 hours, Ethereum (ETH -0.81%) is down 14.7%, and Dogecoin (DOGE -2.09%) is off 9.1%. The two most popular crypto exchange-traded funds (ETFs) are also down. The iShares Bitcoin Trustis off 12.6% and the Grayscale Ethereum Trust down 19.2%. Both are compared to their closing price on Friday.
What drove the rapid sell-off was leverage. This time, it wasn't just leverage in crypto, it was the yen carry trade that sparked the market.
The yen carry trade
Over the past day, a popular trade known as the yen carry trade has started to unwind. The trade involves borrowing yen, which has had an interest rate near zero since before the financial crisis in 2008, and converting it to a currency like the U.S. dollar to buy higher-yield assets.
This is essentially an interest rate arbitrage and there's a good explainer here.
When the trade runs into problems is when the yield on yen debt rises or (worse yet) when the yen's value goes up, making it more costly to convert money back to yen.
Both things have happened in just the last few days after the Bank of Japan increased interest rates from between 0% and 0.1% to a still modest 0.25%.
The biggest problem was a rise in the yen, or drop in the U.S. dollar to yen conversion rate, which you can see below. This quickly turns profits to losses.
US Dollar to Japanese Yen Exchange Rate data by YCharts
Unwinding the trade involves selling the assets acquired and converting funds back to yen. This can push underlying asset values lower and exacerbate the problem.
Leverage makes everything faster and worse.
Crypto's leverage problem
This hit crypto first because crypto trades 24/7 and has a lot of leverage. And in the last 24 hours, the leverage has led to $1.22 billion in liquidations on crypto markets. Of those liquidations, $955 million were long positions by traders.
Liquidations can be a self-reinforcing loop for the market as declines lead to more liquidations, which leads to more declines.
It appears the downward spiral has stopped for now, but if other leveraged trades come under pressure the spiral could begin again.
Crypto isn't a hedge
It's been thought that cryptocurrencies were a hedge against currencies or the market, but it's been clear time and time again that crypto trades in a correlated manner to growth stocks.
That's why there's been such a big decline in crypto when the stock market is also down. That's a concern because stocks are still near all-time high valuations and investors are starting to get concerned about the economy. If the economy worsens and growth stocks drop, they may take crypto with them.
Leverage is a danger in the market and few markets are more leveraged than crypto, so buyer beware.
Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
FAQs
Economic realities and cryptocurrencies
The reason crypto dropped as much as it did last week was the relatively weak economic data that permeated the market. Jobs data was weaker than expected, and factory orders also indicated the economy could be in contraction mode.
Which crypto can give 1000X in 2024? ›
Let's begin.
- Pepe Unchained – Next 1000x Crypto Built on the Layer-Two Ethereum Blockchain. ...
- Memebet Token – 1000X Crypto Platform Powered by the $MEMEBET Token. ...
- Crypto All-Stars – Next Big Meme Coin Ecosystem with High Staking APY. ...
- Flockerz – Meme Coin Introducing a Vote-to-Earn DAO.
Although there are a lot of naysayers out there, convinced that Ethereum still has further to fall before reaching market equilibrium, my prediction is that the next big move for this crypto will be a return to the $4,000 level.
Which crypto will boom in 2024 for the long term? ›
Alongside Bitcoin, four altcoins - Pepe Unchained, Crypto All-Stars, Base Dawgz, and Solana - are showing potential for significant growth in 2024, driven by their unique features and strong communities. After a trying journey, Bitcoin is preparing for another surge.
What is causing Ethereum to fall? ›
The primary reason for the declining ether price since the launch is the legacy Grayscale Ethereum Trust (ETHE). It held roughly $10 billion worth of ether before its conversion to an ETF, and in the week since its conversion has seen outflows of more than $1.8 billion, according to Farside Investors.
Why is Ethereum price crashing? ›
The crypto market is in a significant surrendering phase, with Ethereum and Bitcoin experiencing sharp declines. The key market factors include political uncertainty, geopolitical tensions, economic data, and ETF performance.
Which crypto coin has 1000x potential? ›
LuckHunter (LHUNT) – 40%
Potential Return: The high allocation reflects confidence in LHUNT's ability to deliver substantial returns, potentially reaching 1000x by January 2025 if it captures market interest and achieves its milestones.
Which crypto has the most potential in 5 years? ›
What are the best long-term cryptocurrencies?
- Ethereum. Originally launched in 2014, Ethereum is the world's biggest blockchain for NFTs and DeFi protocols! ...
- Chainlink. Chainlink is a decentralized oracle that allows users to create smart contracts based on real-world events. ...
- Polkadot. ...
- Cardano. ...
- Avalanche. ...
- Aave.
Known as the “Ethereum killer,” Solana (SOL-USD) is one to buy if you want 1000% gains. Since Ethereum's debut in 2015, ETH has revolutionized the crypto world with smart contracts and enabled DeFi and NFTs.
How much will 1 Bitcoin be worth in 2025? ›
Bitcoin Price Prediction Table
| Year | Average Price* | Percent Increase |
|---|
| 2024 | $64,784.06 | -% |
| 2025 | $88,862.10 | 37.50% |
| 2026 | $125,935.23 | 42.05% |
| 2027 | $183,299.42 | 46.40% |
8 more rowsBy 2025, Ethereum is expected to reach a maximum level of $6,500, with a minimum of $4,500 and an average of $5,500. By 2030, it is expected that it may reach a maximum of $20,500. In the current year, we witnessed the Dencun upgrade and Bitcoin Halving, which were anticipated to boost the value of ETH positively.
What coin will be the next Ethereum? ›
Which is the next Ethereum? Some crypto analysts believe that Cardano, Solana, and Avalanche each make a great case as the next Ethereum. However, these smart contract platforms already have a multi-billion dollar market cap. As such, the newly founded project, Wall Street Memes, could be a better alternative.
Which coin will reach $1 in 2025? ›
More commonly known as Ripple, the XRP (CRYPTO: XRP) cryptocurrency seems to be in dire straits nowadays.
Which penny crypto has huge potential? ›
Comparison of Best Penny Cryptocurrency
| Penny Cryptocurrency | Price | Market Capitalization |
|---|
| Telcoin (TEL) | $0.002099 | $187.19 million |
| Ripple (XRP) | $0.4486 | $25.01 billion |
| Stellar (XLM) | $0.0883 | $2.57 billion |
| Data from CoinMarketCap as of July 4, 2024 |
3 more rowsTop 10 Cryptos in 2024
| Coin | Market Capitalization | Current Price |
|---|
| Ripple (XRP) | $30.62 billion | $0.54 |
| Dogecoin (DOGE) | $14.25 billion | $0.097 |
| Cardano (ADA) | $11.72 billion | $0.326 |
| Avalanche (AVAX) | $8.8 billion | $21.79 |
6 more rowsSep 6, 2024
The decline in the ETH/BTC ratio indicates a lack of demand for Ether, with investors preferring Bitcoin over ETH. To put this in context, US spot Bitcoin ETFs have largely been more successful since their approval by the Securities and Exchange Commission (SEC) on Jan. 10 than the spot Ethereum ETFs.
Will Ethereum outgrow Bitcoin? ›
And while past performance doesn't guarantee future results, ether has shown it can perform better than bitcoin during crypto uptrends. So as the market grows, it stands to reason that ether could eventually overtake bitcoin in market size.
Why is Ethereum less valuable than Bitcoin? ›
Bitcoin and Ethereum are example of cryptocurrencies that have risen in popularity. Bitcoin's value rests mostly on its status as the first cryptocurrency and as an alternative to fiat currency, while Ethereum (Ether) offers more utilitarian value through its ecosystem of decentralized apps.
Why invest in ETH over BTC? ›
Overall, Bitcoin focuses on being a digital currency and store of value, while Ethereum provides a robust platform for creating and executing transactions that facilitate the movement of value.
