The cryptocurrency market has been on a downward trend in recent weeks, with the total market capitalization falling to $1.04 trillion, its lowest level in over two months. Bitcoin, the largest cryptocurrency, plunged by over nine percent last week. Some experts are calling the sudden drop a “flash crash.”
The sharp price drop led to the liquidation of billions of dollars worth of hedged positions. Several traders lost millions of dollars in a single trade and 176,752 traders got liquidated over the past 24 hours. This was the most significant liquidation event since the FTX collapse in November 2022.
A large volume of August Bitcoin options contracts are expiring out of the money this week, indicating that an options contract has expired without turning a profit. It could have also contributed to the sell-off.
A report from the Wall Street Journal about SpaceX writing down its Bitcoin holdings did not help with the situation. SpaceX is a space rocket company owned by Elon Musk, a prominent player in the crypto industry.
After investment giant BlackRock filed for approval to sell a spot Bitcoin ETF in June, crypto was poised for a prosperous summer. Investor expectations were high for the approval of the spot Bitcoin ETF, which would mirror the immediate price of Bitcoin rather than relying on futures contracts.
However, the U.S. Securities and Exchange Commission (SEC) once again delayed its decision to approve spot Bitcoin ETF applications. The commission cited concerns over insufficient safeguards against market manipulation.
The deadline for ARK 21 Shares’ spot Bitcoin ETF was pushed back 21 days after the initial date, August 11. Meanwhile, BlackRock’s spot Bitcoin ETF application may not be decided until March 2024.
The SEC also continued regulatory scrutiny following its lawsuit against Binance and Coinbase. Coinbase CEO Changpeng Zhao was sued for allegedly misleading investors and operating an unregistered exchange. Meanwhile, Coinbase faces charges over classifying certain tokens as securities.
Financial difficulties within the Digital Currency Group (DCG) are another driving factor. A subsidiary of DCG is down with an over $1.2 billion debt to the Gemini exchange. In addition, DCS’s Genesis Global Trading declared bankruptcy due to losses stemming from the failure of Terra and FTX. This situation could lead to forced selling of positions in the Grayscale Bitcoin Trust if DCG fails to meet its obligations.
Analysts also attribute the recent decline in the crypto market to macroeconomic factors, including rising interest rates and inflation.
As interest rates break through the five percent mark and inflation remains above two percent, borrowing costs remain elevated. It slowed economic growth and dampened demand for crypto. As household savings dwindle, people will be forced to sell their assets.
U.S. inflation has declined to around three percent from its peak of 9.1 percent in 2022. Meanwhile, the S&P 500 — a benchmark stock index on Wall Street —traded close to its all-time high.
This development increases the market’s expectations that the Federal Reserve will succeed in engineering a soft landing, where economic growth slows but does not contract. However, this could temporarily undermine Bitcoin’s investment thesis as a hedge against inflation.
The Fed will likely maintain or even raise interest rates in the coming months due to high inflation expectations for 2024 and strong annual wage growth. A high-interest rate environment favors fixed-income investments, which are seen as less risky than cryptocurrencies.
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