Bitcoin “collapses” to $49,000, ETH to yearly low, market liquidates over $1 billion

The crypto market continues to wipe out $1 billion in liquidation orders as BTC drops to $49,000 and ETH hovers around $2,200.

The crypto market crash continues to rattle investors. Following the morning of August 5, early afternoon saw Bitcoin dump to $49,000. This is a low price only seen in February this year.

ETH also could not escape the terrible decline of the market today. After falling to its yearly low of $2,100, ETH is now around $2,200.

ETH has almost dropped by $1,000 from around $3,200 just 3 days ago. ETH fell sharply partly because the Jump Crypto fund has continuously unstaken ETH to send to CEX exchanges with a high possibility of selling off.

Jump wallet still holds about 125 million USD staked ETH.

Solana is also not immune to the dumping situation. It is currently trading around 111 USD.

In the past 24 hours, the entire market has been liquidated more than 1 billion USD, with 90% of them being long orders.

Those are liquidations on centralized exchanges. As for on-chain orders, liquidations on Ethereum decentralized protocols have reached 350 million USD in the past 24 hours, marking a new high for the year.

Most of these liquidations are concentrated on three major assets due to the impact of borrowing and lending protocols. ETH collateral assets have borne the brunt of the liquidation, amounting to 216 million USD. wstETH follows with a total liquidation value of 97 million USD and WBTC at 35 million USD.

Meanwhile, the Fear and Greed Index has dropped to 26, at the fear level. Note that this is only the Asian market session, the Western markets have not woken up yet.

Why did Bitcoin and the Asian stock market "collapse" today?

Needless to say, the Asian market session on August 3rd made investors around the world panic. Not only did crypto wipe out more than 1 billion USD in liquidation, financial and stock markets everywhere witnessed a sharp collapse.

The Nikkei 225 index closed at 31,316.62, "losing" 4,568.02, equivalent to 12.7%. This was the worst decline of this index since "Black Monday" in 1987.

The impact of the decline in the Japanese market was not limited to that. The price of BTC calculated in Japanese Yen on bitFlyer, one of the popular exchanges in the land of cherry blossoms, decreased by 15%, quite a difference compared to the decrease in the price of US Dollar on Western exchanges.

Looking for the reasons for Bitcoin and the Asian stock market "collapse" today, we can mention the following:

Bad macro numbers + rising unemployment rate + election reversal => US stocks fall

On the evening of August 2, employment data from the US showed that the unemployment rate in the world's largest economy in July reached 4.3%, higher than the predicted 4.1%.

This information quickly created concern in financial markets as investors worried that this could be a sign of a new economic recession, causing the red to spread, pushing BTC prices to plummet to 60,500 USD.

Not stopping there, such unpredictable economic and political fluctuations made investors worried, dumping stocks, thereby pushing the US market down.

Especially when that signal comes from a legendary investor, Warren Buffett:

Yen carry trade => Japanese stocks fall

Investors sell US stocks and then use the money to pay off their Yen carry trade loans because of the recent interest rate hike.

Unlike most other countries with high interest rates, Japan has maintained zero or negative interest rates for the past 17 years, and for the past 8 years, negative interest rates.

But everything changed in March 2024 when the Bank of Japan ended this and made its first interest rate hike in 17 years.

The Bank of Japan raised interest rates for the first time in March and then again in July this year. Upon closer inspection, people started to panic because the risk of "releasing Yen carry trade" is very high.

What is "Yen carry trade"?

The "yen carry trade" is a financial strategy that involves borrowing money in Japanese yen at a low interest rate and investing it in higher-yielding assets, typically those denominated in USD or Euros. Japan has long had very low or even negative interest rates, which makes borrowing money in yen cheap.

Investors borrow money in yen, convert the borrowed money into another currency (such as USD) and invest it in higher-yielding assets. These assets can be bonds, stocks, or other financial instruments in countries with higher interest rates or yields.

The profit from the "carry trade" comes from the difference between the low interest rate paid on the yen loan and the higher return on the assets invested. For example, if an investor borrows in yen at a 0.5% interest rate and earns a 5% return on a US bond, the difference (4.5%) is the profit.

However, since Japan started raising interest rates, some investors will start unwinding their "carry trade" due to shrinking profits.

And "unwinding" means they sell assets, in this case stocks and other assets into USD, then convert them into yen to pay off debts.

Japanese stocks fall, dragging down Asian markets

Investors dumped risky assets such as stocks, crypto, etc. to convert them into yen to pay off debts, pushing the Japanese stock market down sharply.

While Japan is one of the leading markets in Asia, the deep Japanese dump caused other markets to sell off as well.

South Korea's Kospi index fell 8.1% before trading was halted for 20 minutes due to the large drop that triggered the exchange's automatic shutdown mechanism. The Kosdaq index of small-cap stocks fell 11.71%.

Hong Kong's Hang Seng fell 2.2%; and the Shanghai Composite Index of mainland Chinese stocks fell more than 1.4%.

Meanwhile, the BTC price on the afternoon of August 5 temporarily stopped slightly around 52,500 USD after retreating to 49,000 USD. But traders cannot rest assured when tonight's US session is expected to continue to be a "bloody" session.