TL; DR
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$4T left global markets as investors closed carry trades in the Yen, leading to a crash in stocks, commodities and cryptocurrencies – but this could be the catalyst for harsh rate cuts and liquidity injections, leading to a hit to the crypto markets in 2024.
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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’…this is what it is:
When a central bank raises its interest rates, the value of the underlying currency typically rises.
(For example, the US dollar has strengthened over the past 18 months as the Federal Reserve continued to raise/hold interest rates).
…on the cooler side of the cushion: if a central bank keeps interest rates low, the currency remains cheap.
(For example, exactly what the Bank of Japan did, which led 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 gain in value. faster (e.g. the US dollar, stocks, commodities, etc.).
It works beautifully!
…until that’s not the case anymore.
See, the Bank of Japan (BoJ) recently raised interest rates from 0.1% to 0.25% (making the yen more valuable), while the US Federal Reserve is expected to cut rates (making the US dollar less valuable).
That means those carry trades are about to hit fewer profitable and required higher interest payments.
So traders sell out and take their profits…the only problem is:
There is (or at least was) about $4 TRILLION dollars tied up in these carry trades.
So $4 trillion of selling pressure has just hit the global stock, crypto and commodity markets…
Add that to the already existing uncertainty surrounding a possible war in the Middle East and the results of the upcoming US federal elections…
And then you get yesterday’s market crash.
From Sunday to this writing, Bitcoin went from a high of $61,000 to a low of $49.5,000, Ethereum went from a high of $2.9,000 to a low of $2.1,000, and Solana went from a high of $145 to a low of $110.
Say it with us now: “Phew!”
“…So we’re all doomed?” — the market r.
Let’s take a moment to take our fingers off the panic button and zoom out a little.