- Japan's stock market rallied more than 10% on Tuesday.
- Bitcoin and crypto may have established a new floor after steep losses in last four days.
- All eyes turn to the US stock market open.
Is the worst over?
On Tuesday, investors eyed the 10.2% rebound in Japan’s bellwether Nikkei stock index with hope a summer crash had come to an abrupt end.
With S&P 500 Index up 1.3% in mid-morning trading New York time markets are poised for a rush of liquidity and a hopeful end to the crash.
Bitcoin’s 8% jump in the last 24 hours is bound to rouse animal spirits.
If Monday was indeed the floor, it would cap a rollicking 96-hour stretch in which crypto investors watched in horror as months worth of gains evaporated.
Japan carry trade
Bitcoin shed almost 24% of its value between August 2 and Monday, when it dipped below $50,000 for the first time since February, according to CoinGecko data. And Ethereum plunged 31% in that span.
Now the hope is that this was very much a Japan-specific selloff and the markets will ignore the contagion that poleaxed equities and crypto.
Last week, the Bank of Japan raised interest rates by 0.25% to combat inflation. As a result, the yen is rising in value and putting pressure on Japanese investors who borrowed to invest in all manner of securities, including US stocks.
Unwinding the so-called “carry-trade” is a big reason why the Japanese stock market cratered more than 12% on Monday, its worst performance since 1987.
“Speculation of a wind down of yen/dollar carry trade has also been floating in the market, as borrowers of yen against USD have been forced to reposition their allocations due to change in interest rates,” said Albin Wan, the director of sales for the Asia-Pacific region at BitGo.
Rush to sell
Raphael Polansky, the chief growth officer at BitMEX, agreed. “This has led to a rush to sell these risk assets and repay yen loans, creating downward pressure,” he told DL News.
If that selling cycle is closer to the end than the beginning, the sentiment may buoy US markets Tuesday.
Ever since a weak jobs report spooked investors last week that the Federal Reserve had erred by not lowering its benchmark interest rate this summer, investors have been dumping stocks and crypto.
Yet overnight, the market has snapped back.
Solana, a top performer for much of the year, is up almost 20% in the last 24 hours. Lido Staked Ether also rallied 11% by Tuesday morning, UK time. And the total market value for the sector climbed back above $2 trillion.
Investors in Asia are taking comfort from the fact that this time around crypto was in no way at fault for the selloff.
On Monday, the crash triggered a “sidecar” in the Korea Exchange’s futures market, a mechanism which limits trading for five minutes if its benchmark KOSPI futures contract moves more than 5% from the last close.
‘The resistance level around $48,000 to 50,000 for BTC proved to be strong.’
— Raphael Polansky, BitMEX
But Justin Kim, head of Korea at Ava Labs, told DL News that current sentiment there centres around concerns over the general economy and not crypto markets specifically.
“Hopefully, it’s a sign that the fundamentals of blockchain technology are strong and investors are seeing its long-term value,” he said.
Silver lining
Polansky highlighted another silver lining — this crash established a new floor for Bitcoin and its ilk.
“The resistance level around $48,000 to 50,000 for BTC proved to be strong,” he told DL News.
But he remained wary. “If this trend is significantly broken, the crypto market could see further significant losses in a short period of time.
Rate cuts?
As the smoke clears, the main takeaway may be how yoked Bitcoin is to the monetary policy machinery of central banks, which is not short of irony.
“In the short term, I think it is mostly in the hands of the global market and the central banks to decide how the downward trend will continue,” Polansky said.
The Fed has signalled a rate cut is coming at its September meeting.
Updated on August 6 with S&P 500 data and updated Bitcoin prices.
Callan Quinn is DL News’ Hong Kong-based Asia Correspondent. Get in touch at callan@dlnews.com.