Is Today's Crypto Bloodbath a Buying Opportunity or Falling Knife?

Just when one thought the next trigger for cryptos was more or less cementing itself, a recession risk threw a spanner in the trade pattern widely expected before US data late last week.

On Monday, as a result of widespread fear of loss in global financial markets, cryptocurrency prices plummeted, with Bitcoin falling by more than 10% and Ethereum dropping by more than any other digital currency since 2021.

Declining more than 17% over the week, Bitcoin slipped to below $50,000 while Ethereum dropped 27% over the same period, crashing as low as $2,202.

The falls coincide with a worsening worldwide market selloff, reflecting worries about the economy and doubts about whether the technology's artificial intelligence investments can deliver as promised.

Investors are already wary due to the escalating geopolitical tensions in the Middle East.

On Monday, fears that the Fed is lagging in its policy support for a faltering US economy fuelled a worldwide stock selloff.

One wonders if cryptos will entice dip buyers or fall victim to deeper exits as inflows into Bitcoin exchange-traded funds in the United States fell to the lowest in three months.

Cryptos Falling Victim to Carry Trade Reversal?

As investors prepare for Japan's interest rate hikes, digital assets are feeling the pinch of the yen carry trade's unwinding.

Since reaching a record high of $73,798 in March, Bitcoin has been affected by several factors. One of these is the change in US politics, with Republican Donald Trump, who is pro-crypto, and Democratic opponent Kamala Harris, who has not yet stated her position on digital assets, vying for the presidency.

There is a supply overhang risk associated with tokens returned to creditors through bankruptcy procedures, and the prospect of governments selling Bitcoin that they have confiscated is another cloud over the market.

On Monday, Bitcoin hit a new low, putting the currency at levels not seen since February. At the same time, the price of Ether dropped back down to where it was at the beginning of the year.

Investors' reaction to newly launched US spot-Ether ETFs is uncertain, much like Bitcoin.

The crypto meltdown was allegedly spearheaded by Ether, leading to speculation on social media about institutional sellers of Ether-linked assets.

According to Coinglass data, a significant amount of $700 million worth of optimistic crypto holdings hedged with derivatives were sold off in the last 24 hours, indicating that leveraged bets are starting to backfire.

Fed's Rate Cuts To Eventually Boost Cryptos

The correction in risk assets is a good thing for investors. The run-up in global stocks without a Fed pivot looked suspicious.

With the risk of a recession jumping, the Fed may be called upon to pull out its knife and boost cryptos.

Some "panic" ensued due to the widespread stock market decline, prompting investors to seek liquidity quickly to pay off margin calls.

But the crypto retreat is a great chance to buy. Compared to gold's 19% increase and a worldwide stock index's 9% gain, Bitcoin's year-to-date returns are about 24%.

The market price movement highlights the rapid change in attitude away from the belief that the Fed can facilitate a gentle landing for the US economy.

According to data released on Friday, U.S. nonfarm payrolls saw one of the worst prints since the pandemic.

Meanwhile, the unemployment rate unexpectedly rose above the Fed's year-end prediction, setting off a frequently monitored recession signal.

Analysts at Goldman Sachs have increased the probability of a US recession to 25%.

Bond traders have been wrong-footed on several occasions when the economy has defied predictions of a recession or inflation by wildly predicting the future of interest rates, which have fluctuated in both directions since the pandemic.

Bond prices similarly soared towards the end of 2023 on the belief that the Fed was about to begin relaxing policy. Still, they promptly lost all their gains as the economy continued showing unexpected resilience.

As investors liquidate their assets to cover their losses, widespread deleveraging is currently underway.

Due to widespread panic selling, risk assets respond non-linearly to very simple basic dynamics.

Bloodbath To Lead A Strong Recovery

The knee-jerk reaction, albeit violent, is a good trigger for a strong recovery, and BRN expects digital assets to post strong gains in the second half of this year once the Fed starts to cut rates.

BRN analyst, Valentin Fournier, explains, "We warned investors about the risk-reward ratio being limited to $69,000 last week and recommended decreasing their exposure. We believe every strong dip represents a buying opportunity and recommend slowly getting back into the crypto market. Bitcoin did not lose any fundamental value and we do not believe the bull run is over yet."

A thread on current crypto downturn🧵 (1/8) #Cryptocurrencies took a major downturn towards the end of Sunday and the beginning of Monday. Over 12 hours, #Bitcoin lost 17% of its market cap while #Ethereum fell 18%.
— BRN (@thebrn_co) August 5, 2024

Recession bets will push the US central bank to cut rates faster than expected last week. In turn, that will support cryptos to outperform other assets as they have done this year.

Wider acceptance of cryptos as a mainstream asset is gaining traction, with ETFs and large institutional investors joining the action.

While volatility will kick in in the run-up to the US presidential elections, the broader theme will be an upside for cryptos.

Reports show that Morgan Stanley has authorised hundreds of financial advisors to approach qualified consumers about buying spot Bitcoin ETFs as early as this week.

The investment firm informed its 15,000-strong advisor network in a note that they can recommend the Fidelity Wise Origin Bitcoin Fund or BlackRock Inc.'s iShares Bitcoin Trust to certain customers.

Morgan Stanley's conditions include that clients must have a net worth of at least $1.5 million, a high risk tolerance, and a purpose in engaging in speculative assets.

Thanks to Morgan Stanley's move, other banks that have been hesitant to provide digital assets may now consider entering the market.

Since the US SEC authorised spot-Bitcoin ETFs in January, the group has nearly destroyed expectations from asset movements.

BlackRock's IBIT, which has been around for around 22 billion dollars, is at the head of the pack.

The FBTC from Fidelity has raised $11 billion. The group of US Bitcoin ETFs has achieved a record-breaking start for a fund category, garnering approximately $18 billion in net inflows since its debut.

Gracy Chen, CEO at Bitget, explained, "Judging from historical trends in the crypto market, before the market forms a true bullish drive, it needs to experience a sharp decline to reduce the long positions of the contract in order to reduce the selling pressure for future rises."

"This is a key factor in the rapid rise of the market, observers can continue to pay attention to changes in the macro market including the panic index indicators. At present, the core key to affecting the market trend is the sentiment index. If VXX starts to fall, it means that the panic sentiment has eased."

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