I’m currently on vacation right now, but of course, I’ve been keeping an eye on the crypto market, and let’s just say it was captivating to follow over the last few days. Let’s explore why this dump in the stock and crypto markets happened and what to do.
Liquidations
Let’s look at some numbers. In the crypto market, $1 billion was liquidated in the span of one day, which is a staggering amount.
Source: Coinglass
Looking at the US stock market, it’s even crazier, with more than $1 trillion wiped out. This is somewhat expected due to the large capitalization of the US stock market.
Source: Twitter (X)
And that’s only the US stock market. The Nikkei also experienced a record drop today with a performance of -11% !
Overall, every stock market in the world opened with a red candle. But why ?
The Reasons
The principal and most important reason is the increase in the interest rate by the Bank of Japan from 0.10% to 0.25%, which was not anticipated by the market.
Source: TradingEconomics
This had a significant impact on investors involved in “carry trades.” To explain briefly : It’s a strategy where investors borrow money in a currency with low interest rates and invest in assets in a currency with higher interest rates (usually bonds and the stock market).
Japan is one of the few developed countries that has maintained a low-rate policy, making the yen key in this carry trade strategy :
- Borrowing Yen: Investors borrow Japanese Yen (JPY) because they can get loans cheaply due to low rates.
- Investing Elsewhere: Investors then convert the borrowed Yen into another currency, like the US Dollar (USD), where they can invest in assets (like bonds) that offer higher interest rates.
- Profit from the Difference: The profit comes from the difference between the low interest rate paid on the borrowed Yen and the higher returns earned from the investments in the other currency.
- Risk: The main risk is currency fluctuation. If the Yen strengthens significantly against the other currency, converting back to Yen could result in losses.
As explained, the risk of the yen strengthening is materializing right now, especially due to the Bank of Japan’s decision and the fact that loans taken in yen are being repaid. This has led people who used loans in yen to buy stocks in other countries to sell their positions to pay back their loans.
Middle East Tensions
Another contributing factor is the tension between Israel, Lebanon, and Iran. The Iranian regime is expected to strike Israel in retaliation for the assassination of Hamas leader Ismail Haniyeh on Iranian soil.
Photo by Michael Afonso
Conclusion
Uncertainty is back in the market, which is why investors are wary of risk-on assets like crypto or stocks. There’s a lot of FUD (fear, uncertainty, and doubt) circulating, and I believe that during times like this, opportunities for profit can arise ! But, of course, with careful management of your investments. Good luck !
Quick update : The Asian stock market and the crypto market is bouncing back, is this this end of the fall ? We’ll have to wait to see
As always thank you for reading !
My favorite Crypto Faucet : Cointiply (referral)
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Disclaimer : This is not a financial advice, you need to do your own research !
