The 'Unknowns' Driving Cryptocurrencies

Cryptocurrencies are bobbing up and down with no clear trigger or direction, even as stocks and bonds have made a remarkable comeback from last Monday's market mayhem.

While crypto tokens recovered from their worst sell-off early last week since the days of FTX's collapse in 2022, Monday saw a broad decline in digital assets.

This comes after Bitcoin registered its largest one-day gain in over 16 months on Thursday.

On that day last week, the largest digital currency experienced an 8.6% increase to exceed $59,800. But the token has since fallen back again to trade around $58.600.

Ethereum, the second-largest token, also experienced a nearly 10% increase at one point late last week but is down over 3% to just over $2,500 on Monday.

It is a hybrid of conventional markets and the aftermath of a crypto-market collapse. Those who were compelled to sell have yet to disappear completely.

The latest US labour market reading on Thursday alleviated concerns regarding a more severe downturn in the world's largest economy, resulting in a substantial stock revival and a decline in bonds.

But that has not done enough to boost the crypto market broadly yet.

Cryptocurrency prices initially recovered a portion of their losses; however, that recovery looks short-lived at the moment.

Bitcoin is down a touch over 4% for the day and nearly 15% lower over the last two weeks. But for the past week, Bitcoin is up 7%, and for the year so far, the token is up nearly 100%.

All eyes will be on the US inflation data due on Wednesday for cues to the Fed's rate path, with rate cuts predicted in September.

With the Fed rate cuts, it is becoming clearer that the question now is not if but by how much.

Fed's pivot to easing is widely considered the next big trigger for cryptos to march higher after Bitcoin ETFs and wider token adoption by large institutional investors in the first half of this year.

The Carry Trade Blowup & Cryptos

The worldwide market crash of last Monday appears to have been more than a little earthquake. It was a temporary panic caused by a shift in policy at the Bank of Japan and renewed concerns of a US recession.

Well, at least for the broader global markets.

The fact that it developed and then died out so fast, though, shows how susceptible markets are to a tactic that hedge funds used to wager hundreds of billions of dollars on issues worldwide.

The so-called "yen carry trade" guarantees quick money: Take out a loan in Japan, where interest rates are among the lowest in the world, and invest the money in Mexican bonds with yields of 10% or more, Nvidia's skyrocketing stock price, or even Bitcoin.

The declining value of the yen made the loans even more affordable, and the larger the payoffs.

Suddenly, investors started withdrawing money from the deal, which sped up the yen's recovery and caused traders to quickly sell stocks, cryptos, and other currencies to cover their margin calls.

Concerned that the currency spike would hit exporters hard, it also shook Japan's stock market, triggering the country's worst one-day sell-off since 1987, erasing $1.1 trillion of the $6 trillion stock market.

More importantly, the deep sell-off in cryptos reminded investors of the mayhem during the collapse of FTX.

The markets in carry-trade hotspots sputtered for weeks, cryptocurrencies fell from their highs, and concerns that the Federal Reserve had maintained monetary policy excessively tight for an extended period grew, all adding to the mounting pressure.

Then, the spark was struck: Japan's interest rate rose.

Although the BOJ's benchmark remains at the lowest level in the industrial world, at 0.25%, the substantial hike at the end of last month prompted investors to reconsider their long-held view that Japanese borrowing costs will always remain around zero.

Markets have now levelled out, at least due to that reason.

However, the experience is causing concerns regarding the level of leverage that had grown in Japan due to the central bank's decision to keep printing money despite the increase in post-pandemic inflation.

And because of this, nervous traders are attempting to predict whether the unwinding has mostly ended or will have further market repercussions in the coming weeks.

Bitcoin Reserves Drop To A 3-Year Low

After the April software code adjustment called 'Halving', the quantity of Bitcoin held in reserve by companies that generate revenue by validating transactions on the blockchain has plummeted to its lowest level in three years.

Bitcoin Miners Hold Least BTC in Three Years
(The halving event in April has cut into profits)

According to a report by crypto researcher Kaiko, the aggregate quantity of Bitcoin held by miners has decreased to approximately 1,510,300 tokens as of August 3.

This is a decrease of approximately 2.4% from the record quantity held in December 2020.

The current value of the quantity is approximately $86 billion, equivalent to approximately 8% of the total Bitcoin in circulation.

Miners have been selling tokens since the price of Bitcoin began to rise in late 2023, which was well before the most recent "halving" in April, according to the data.

The companies frequently utilise the proceeds from the sales to cover operating expenses.

As a result, since the latest software upgrades, they have received fewer new tokens as rewards.

Kaiko reports that the revenue loss experienced by miners was temporarily alleviated by the increase in network fees following the halving.

However, this effect was short-lived, and the average fees have since declined to $2 from a post-halving high of $143.

The 'Unknowns' In US Politics Driving Cryptos?

A Bloomberg report quoting a source showed top crypto executives voiced their concerns on the current digital assets policy to white house advisers on a Zoom virtual call on Thursday last week.

The source, however, said advisors to the Biden administration did not make any commitments to crypto sector leaders.

The delegation, which included representatives from Ripple Lab, Kraken, Coinbase Global, and Kraken, criticised crypto policy with the white house advisers.

This comes after a prior meeting in July, which yielded no broader headway.

Ripple and Coinbase have publicly criticised the digital-asset regulations and activities of the US Securities and Exchange Commission (SEC).

They have also been the largest contributors to the Fairshake political action group in this election cycle.

The discussion, though, did not lead to any clear change in the Joe Biden administration's crackdown on the digital assets industry.

On the other hand, the campaign of republican candidate and former president Donald Trump has publicly supported the crypto business.

Trump has pledged to back bitcoin mining in the US and oppose digital currencies issued by central banks.

So far, Harris's team has been mum about the candidate's stances on the crypto industry.

After the virtual call, Paul Grewal, chief legal officer of Coinbase said: "The focus is on the future."

Grewal said he has had many direct conversations with the Harris campaign in the past two weeks.

He added that Thursday's call "stood in marked contrast to my experience with the Harris campaign."

Still, the 'unknown' is the driving force behind digital assets moves in the runup to the US presidential elections.

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