Bitcoin experienced a significant downturn on Monday, sending shockwaves through the digital asset space and prompting analysts to reassess trading strategies.
This bloodbath resulted from a complex interplay of factors, including the unwinding of the Japanese Yen carry trade, macroeconomic concerns, and substantial selling pressure from key market players.
Despite the downturn, there are signs that Bitcoin is stabilizing and potentially recovering. At the time of writing, Bitcoin is changing hands for $54,803.07 after having bounced back 10% compared to this time yesterday, according to CoinGecko. But analysts still advise caution.
According to research firm 10x Research, financial markets are like puzzles that need to be reassembled periodically, with new drivers of asset prices emerging. This is one of those times, the firm wrote.
When the markets saw sharp declines in April and June, they were mitigated by increased leverage. Such a reversal may not occur this time, wrote 10X Research CEO Markus Thielen.
“Risk management is crucial during such periods to protect trading capital. August and September are notorious for slow trading. Many institutional players are on vacation, and deploying large amounts of capital is the last thing on their minds,” he wrote. “Opportunities will likely arise once this period ends.”
After Monday’s Bitcoin sell off, analysts also highlight the importance of monitoring macroeconomic factors, particularly the rate gap changes between the Federal Reserve and the Bank of Japan (BoJ).
The Federal Open Markets Committee (FOMC), which sets the target federal interest rate, won’t meet again until September 17. But investors will be watching closely for assurance that a rate cut is on the horizon.
As of Tuesday afternoon, investors appear certain that the FOMC will cut interest rates in September. They only disagree on how much of a cut markets will see. Roughly 75% of investors think the Fed will cut interest rates to 50 basis points to 4.75% to 5%. The rest think the Fed will recommend a 25 basis point cut to 5% to 5.25%, according to the CME FedWatch Tool.
The recent BoJ rate hike and subsequent recovery in the Nikkei 225 suggest that market risks may not be fully priced in yet.
“The likelihood of carry trade unwind triggering a complete turnaround in the U.S. financial cycle is low,” according to crypto exchange BloFin.
However, they caution that Bitcoin and more traditional equities prices could fall further if the Fed-BoJ interest rate gap narrows rapidly.
Despite the gloomy outlook, there are signs that the market may be primed for stabilization.
On-chain analysis firm IT Tech pointed out on CryptoQuant that the current estimated leverage ratio, 0.1758, “is the lowest since early 2020” and that open interest—or open derivatives contracts—has sunk to $14 billion “also the lowest since mid-2021.”
“The market appears sufficiently deleveraged post-crash, potentially leading to more stability and setting the stage for a recovery, assuming other market conditions remain favorable,” IT Tech added.
However, analysts caution against hasty actions in this volatile environment.
“While buying the dip can sometimes be a sound strategy,” 10X Research’s Thielen wrote, “it remains too risky now.”
Offering a longer-term perspective on the market, BRN analyst Valentin Fournier said Bitcoin will keep pushing higher until the end of the year with an acceleration in October—but August and September could be volatile.
He recommends a strategic approach to the current market conditions, advising investors to “progressively increase positions,” and views the current dip as “an interesting buying opportunity.”
Edited by Stacy Elliott.
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