Why Bitcoin and Ether are in retreat

Cryptocurrencies tumbled on risk aversion in global markets on Monday, as investors continued rushing to safe haven assets on worries of the possibility of a US recession and increasing geopolitical tensions in the Middle East.

Bitcoin, the world’s largest cryptocurrency, traded 12.7 per cent lower at $52,723 at 11.37am in the UAE, adding to a 13.1 per cent drop last week that was the worst since the period when the FTX exchange imploded.

Second-ranked Ether, the token underpinning the Ethereum blockchain, recorded the steepest fall since 2021.

The price of Ether dipped 19.24 per cent lower to trade at $2,343.99. Most major tokens were deeply in the red.

“The sell-everything moment for the markets is back. Initially, the Bank of Japan’s interest rate hike triggered a massive sell-off in Japanese risk assets,” said Bhavik Mehta, deputy head of research – investment products at Century Financial.

“As a natural consequence of the rate hike in Japan, one of the major carry trades of the market, borrowing cheap money in Japan and investing in other high-yielding developed market assets, started to unwind. This was accompanied by a sharp rise in the Japanese yen.

“Crypto, one of the riskiest assets with a high beta and aggressive risk-return profile, has finally started to show its market behavioural pattern. With an average down move of more than 20 per cent over the weekend, major cryptocurrencies led by Bitcoin and Ethereum are now in a bloodbath as crypto investors try to ascertain the complete impact of the BoJ rate hike.”

Crypto markets received a boost this year after the US Securities and Exchange Commission approved an exchange-traded fund to track the spot price of Bitcoin and Ether. The ETFs have resulted in hundreds of millions of dollars flowing into the coins.

More recently, however, Bitcoin has fallen alongside other assets, including global equities, in a broad sell-off as investors fear that a US recession could be on the horizon, with rising geopolitical worries also weighing.

Last week’s drop in stocks was attributed to disappointing earnings, a weaker-than-expected jobs report, higher unemployment and a declining manufacturing sector.

The largest cryptocurrency is off nearly 20 per cent from its March 2024 high of $73,798.

Bitcoin has been hit by a number of factors, including changing US political fortunes as pro-crypto Republican Donald Trump and Democratic opponent Vice President Kamala Harris lock horns in the presidential race.

“Apart from the unwinding in the Japanese carry trade, crypto markets are also examining the latest outcomes of the US presidential election polls,” Mr Mehta said.

“With Kamala Harris raising nearly $300 million-plus for her campaign, some polls are putting her in a slight lead over Trump. Again, crypto lovers are getting nervous about the fact that the re-election of a Democratic candidate would bring more regulation to this space.”

The jobs report in the US fuelled concerns of a severe slowdown for the US economy and sent stocks sharply lower in the US, with the VIX closing at its highest level since 2022, according to Josh Gilbert, market analyst at eToro.

This volatility has flowed into today’s Asian session. Japan is a big market for crypto, and a rate hike followed by the prospect of further rate hikes is seeing investors take a “risk-off” approach, he said.

“If we look back to the Fed’s first hike in March 2022, Bitcoin sold off by more than 50 per cent by the end of the year. Although this is not a like-for-like, Japan is one of the world’s largest economies, and therefore, it has a global impact,” he added.

In the crypto market, the summer months have historically been slower than other months of the year, with consistently smaller returns. It is possible that these seasonal dynamics are coming into play here, according to Richard Teng, chief executive of global crypto exchange Binance.

Despite these challenges, this is not indicative of a long-term negative trend for the crypto market, Mr Teng said.

Crypto is often a leading indicator of sentiment. If investors panic or are looking to deleverage, crypto is often the first asset on the list, and that is driving this large sell-off, Mr Gilbert said.

However, in these scenarios, it is important to zoom out. Crypto assets have sold off, but many investors will see an opportunity.

Global financial markets in turmoil amid fears the Fed is behind the curve

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“We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” he said.

“When you invest in crypto assets, you’re stepping into the ring of volatility. This is a small jab for crypto, not even a black eye. We’ve got more rounds left of this bull market before the bell rings.”

Near-term outlook

The near-term outlook for both Bitcoin and Ether remains bearish. At the macro level, it should be noted that from their current peak, Bitcoin is down by 28 per cent and Ether is down by nearly 45 per cent, according to Mr Mehta.

Compare this with the Nasdaq 100 index, down by 16 per cent from its current peak. Historically, during such downfalls, cryptos have tended to overreact to the market downfall, he said.

“Bitcoin is already trading near the make-or-break level of $50,000. A break below this would see the crypto nosediving to $40,000, its next support area,” he said.

“Ethereum, down by 28 per cent in today’s session, has already broken the crucial support of $2,800. One of the major downside technical support areas to watch out for would be the support at $2,000.”