August 4 and 5, 2024 will be remembered for a long time because everything went down: from stocks to cryptocurrencies. NASDAQ lost about 20% from its all-time highs in a few days, S&P500 3.5%, South Korea stopped selling after the market fell 4.6%, the Taiwan index had its worst day ever recorded in history, the largest Japanese banks lost 10 to 15% (NIKKEI -12.5%), the VIX (S&P500 fear index) is touching 50 points (2022 collapse values), BTC lost 15%, ETH over 20% and many altcoins recorded -30% in 24 hours. Gold and silver have also fallen.
What is happening? What caused the market collapse? War? Recession? I would like to emphasize that in my opinion this is not the beginning of a Bear Market but a retracement. Do you remember "Covid Crash"? (march, 2020):

Then remember what happened from October 2020? Maxi bull market until November 2021. Today, reasons why cryptocurrencies are crashing:

• FED has not yet cut rates
• Decreasing probability of Trump's presidency (Harris has regained consensus in recent days)
• Fears of recession
• Stock market collapse
• Warren Buffett liquidating half position in Apple
• Possible outbreak of war (Israel/Iran)
• Jump selling crypto
• Mt.Gox BTC distributions
• Sale of seized BTC of various governments (Germany and USA)
• High leveraged positions liquidated
• Carry Trade on Yen/USD

CARRY TRADE
Leaving aside some political, macroeconomic reasons and sale of seized BTC a decade ago, the issue of carry trade is very interesting. Carry trade is an investment strategy used in the financial market based on lending. It involves borrowing money in a currency with low interest rates and investing in another currency that offers higher interest rates. The goal is to earn on the difference in interest rates between the two currencies, known as the "interest rate differential".

Imagine this:
-Borrow a currency at a low interest rate (borrow)
-Convert to a currency at a high interest rate for the income (deposit)
-Use it for bonds or savings accounts
-Earn on the interest differential
-Sell the foreign currency, buy back your own and repay the debt

If you think about it, this is what you usually do in Defi on lending platforms: borrow an asset at a low interest rate, sell it and deposit it elsewhere for a higher interest. Imagine an investor borrows 1 million Japanese yen at an interest rate of 0.1% and converts it to US dollars, where the interest rate is 4%. The investor then invests in a US bond. If the exchange rate remains stable, the investor will earn 3.9% (4% - 0.1%) as net profit.

RISKS OF CARRY TRADE
If the value of the investment currency (the one with a high interest rate) decreases in value compared to the loan currency, the investor can suffer significant losses. The same happens if the currency sold, increases in price. Obviously the Forex market is not very volatile but it still moves.
Another problem is if the interest rate of the borrowed currency increases or that of the investment currency decreases, the interest rate differential narrows, making the strategy less profitable or even unprofitable.

WHAT HAPPENED TO THE YEN, THE US DOLLAR AND STOCKS? CARRY TRADE!
Many traders have borrowed Japanese yen at very low interest rates. In fact, after Covid, interest rates have increased in almost all of the world. In Japan, on the other hand, there has been a situation of Stagnation (negative recessionary inflation) since the 90s. This is because Japan has maintained low interest rates to stimulate its economy. Because of this, it is very convenient to borrow US dollars because they offer a higher yield.
After borrowing yen, traders converted them into US dollars, this brought enormous selling pressure on the yen which collapsed drastically (and it would have been super convenient to repay the loan in the future because the US dollar that is held strengthens, instead the amount borrowed falls in value). In the meantime, many traders with the US dollars obtained, have also started to buy US stocks. This was done because the US stock markets were performing well and potentially offering good returns. In view of this situation, the Bank of Japan (BOJ) started to raise interest rates, making it less profitable to borrow yen. As interest rates increased, the yen strengthened against the US dollar (by as much as +12%), making the strategy less profitable as it costs more to keep the loan open. The loan should be closed as soon as possible.

Since the value of the US dollar has decreased against the yen, when traders convert their US dollars into yen to repay the loan, they get less yen than they borrowed in the first place. And the traders found themselves in big trouble. In an attempt to limit their losses and collect US dollars, traders sold their US stocks (at a loss) to close the loan. This massive sell-off of US stocks is putting downward pressure on prices, contributing to the decline in US stock markets. There would be 1 trillion dollars at stake between stocks and crypto, according to some Japan could solve this problem by starting to "print" more fiat, the big problem is that among the most indebted nations in the world.

COLLAPSE OF THE JAPANESE INDEX
The Nikkei 225, the benchmark index of the Japanese stock market, has fallen by more than 25% from its highs ((worst value since 1987). As mentioned, the Bank of Japan is raising interest rates to control inflation, a common practice when inflation exceeds desired levels. It is difficult to believe that the Japanese economy can sustain such high interest rates, given that for decades the rates have been close to zero. Higher rates increase the cost of financing for companies and consumers, slowing economic growth. The appreciation of the yen makes Japanese exports less competitive on international markets. When the yen strengthens, Japanese products become more expensive for foreign buyers.
Large Japanese multinationals, which earn a significant portion of their revenues abroad, will see a reduction in yen-denominated profits when reporting overseas earnings due to the unfavorable exchange rate. Japanese stocks are facing a significant correction due to the BOJ's interest rate hike and the strengthening yen, which together are creating a difficult environment for Japanese companies, especially those that rely on exports.
In summary:

-Raising interest rates (to control inflation) tends to strengthen the local currency (in this case, the Japanese yen has appreciated against other currencies, such as the US dollar)
-Strong yen makes Japanese exports more expensive and less competitive in international markets. Companies that export a lot of their products see a decrease in external demand
-Japanese multinationals that earn in other currencies see a decrease in their net profits when converted to yen

These combined factors are leading to declining investor confidence and a sell-off in Japanese stocks, causing the Nikkei 225 index to decline. Companies are facing higher financing costs and a reduction in the competitiveness of their exports, which may lead to reduced investment and future profits, further collapsing Japanese stock prices.

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