TL;DR

• $4T left the global markets as investors closed their Yen carry trades, leading to a crash in stocks, commodities, and crypto — but this could be the catalyst for hard rate cuts and liquidity injections, leading to a blow off top for crypto markets in 2024.

Full Story

If you opened your trading apps yesterday morning only to be accosted by a sea of red and want to know what happened — we’ve got you.

It all started with the Japanese ‘carry trade’…here’s what that is:

When a central bank raises its interest rates, its underlying currency typically goes up in value.

(E.g. The US dollar has been gaining strength over the past 18 months as the Federal Reserve continued to raise/hold interest rates).

…on the cooler side of the pillow — if a central bank keeps its rates low, its currency stays cheap.

(E.g. Exactly what the Bank of Japan has been doing, leading to a weaker/cheaper Yen).

And herein lies the opportunity for a ‘carry trade.’

Investors take out loans in Yen (with lower interest rates / repayments) to buy other assets that are gaining value, quicker (e.g. the US dollar, stocks, commodities, etc).

It works beautifully!

…until it doesn’t.

See, the Bank of Japan (BoJ) recently raised rates from 0.1% to 0.25% (making the Yen more valuable in the process), while the US Federal Reserve is expected to start lowering rates (which will make the US dollar less valuable).

Which means those carry trades are about to become less profitable, and require higher interest repayments.

So traders are selling out and taking their profits…only problem is:

There is (or at least, was) about $4 TRILLION dollars locked up in these carry trades.

So $4T of sell pressure just hit global stock, crypto, and commodity markets…

Add that to the pre-existing uncertainty surrounding potential war in the Middle East and the results in the upcoming US federal election…

And you get yesterday’s market crash.

From Sunday till the time of this writing, Bitcoin went from a high of $61k to a low of $49.5k, Ethereum went from a high of $2.9k to a low of $2.1k, and Solana went from a high of $145 to a low of $110.

Say it with us now: “Oooft!”

“…so, we’re all doomed?” — the market rn.

Let’s take a moment to remove our fingers from the panic button, and zoom out a bit.

Here’re some positive future potentials:

1. The Federal Reserve has been itching for an excuse to lower interest rates and turn the money printer on.
   
   Adding more money into the system → while allowing investors to take out larger loans/take riskier bets → and for everyday folks to save more on their loan/credit repayments.
   
   (Bolstering/growing the US economy in the process).
   
   Problem is, they’ve been trying to battle inflation at the same time. Unfortunately, lowering rates and printing money is the perfect recipe for inflation.
   
   But now the global economy is weakening, there’s a higher likelihood that they’ll be able to do both without risking runaway inflation.
   

2. With a whole bunch of fresh cash floating around the system at low rates, and stocks/crypto/commodities at new lows — investors will be incentivized to go bargain hunting.
   
   And their shopping list will probably include certain hedges against reckless government money printing/spending.
   
   Hedges like Bitcoin…and when BTC runs, the rest of crypto tends to follow.

…now — we’ll admit — this is a very rosy picture we’re painting here.

There might be too much fear in the market for such a buying spree to take place and affect the crypto markets — who knows?

But a similar injection of cash and lowering of rates got us through the C-19 crash, and yesterday had waaay less obvious future impacts on the global economy than the spicy flu did.

And (at the time of this writing) we’ve already seen a hard bounce from crypto.

After hitting their lows, the majors came back with force!

After the US market opened yesterday, Bitcoin moved from a low of $49.5k to a high of $55.5k, Ethereum moved from a low of $2.1k to a high of $2.5k, and Solana moved from a low of $110 to a high of $135.

(If we didn’t have the context of the preceding crash — we’d say markets were ripping!)

This is a great sign.

It tells us that the market saw the crash as a buying opportunity, instead of a signal to sell everything and buy a bunker in an undisclosed location (à la 2020).

*gasps for breath…