After a black Monday worthy of the name, when $BTC crashed all the way down to $49,300, the king of the cryptocurrencies has recovered to $56,000 on Tuesday. Will the recovery continue, or is this just the beginning of a headlong crash into the next bear market?
Crypto 24-hour trading was the achilles heel
Bitcoin and crypto trade 24 hours, every day of the year. This is a major advantage that this innovative sector has over traditional markets. However, over the weekend, this became crypto’s achilles heel.
The reason why is that the Japanese central bank recently raised its interest rate 25 basis points. For any other central bank that isn’t anything shocking, but for the Japanese central bank this was only the second time it had raised rates since 2007.
Not only this, but the raise was sufficient to impact on what is known as the “Yen carry trade”. This is where institutions such as hedge funds take advantage of the low rates in Japan, compared with the U.S. for example.
These funds borrow money with the artificially low rate of interest, and then leverage this up to buy assets such as U.S. treasuries, thereby benefiting from the spread. However, the 0.25% rise in Japanese interest rates has meant that this spread is suddenly not as profitable, which has spooked the market, and caused those hedge funds to start unwinding their positions.
At the weekend, there is no trading of traditional financial assets - a major problem for those hedge funds which were trying to raise the liquidity to close out their carry trade. Therefore, cryptocurrencies became the only sellable assets, and this is what caused the crash in Bitcoin et al.
US dollar holds support against the JPY
Source: TradingView
So is there going to be further impact felt in the cryptocurrency market? The USD/JPY pair experienced a big 12.5% fall in favour of the Japanese yen, thereby weakening the dollar, but this appears to have found support at around 145 JPY.
The carry trade is likely going to continue unwinding, but at least the major stock markets are now trading, and Monday saw a more than $6 trillion sell-off in traditional assets across the board.
A rumour was that the Federal Reserve would step in by way of an emergency meeting in order to raise rates straightaway. However, that course of action is doubtful, given that the markets could interpret this as ‘desperation’ from the Fed.
A considerable bounce from $BTC
Source: TradingView
As for $BTC, it can be seen in the weekly chart above that the price has bounced considerably from the low at around $49,300. Strong support from the previous bull market, plus this one, provides a band from $52,000 down to $51,000.
If the $BTC price can end the week above the support at $55,600, there is a chance that the price could continue to recover from there. If, on the other hand, the $51,000 support does not hold, and the price crashes down and through, the next strong support is at $43,000 down to $41,000. Below this is the bull market trend line, which would be the last line in the sand.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
