With the unwinding of yen carry trades, the global market flash crash has concluded. Tide Capital anticipates a gradual bottoming out and recovery of the market. Although BTC shows potential for upward movement, uncertainty surrounding the U.S. election might initially affect prices before a final upswing.
Global market flash crash ends and recovery begins
The recent turbulence in global markets was triggered by a sharp drop in Japanese stocks on August 5, causing a global sell-off and increased volatility. However, in the following four trading days, global indices rebounded, effectively recovering the early-week losses. Concerns that the unwinding of large yen carry trade positions might spark a liquidity crisis similar to that of March 2020 have eased. Tide Capital reports that these liquidity fears have dissipated, with market volatility significantly reduced.
The impact of unwinding crowded trades appears to be over. This volatility stemmed largely from the reversal of high-leverage strategies, including shorting the yen and going long on equities. High-leverage funds have rapidly reduced their short positions in yen to a yearly low, signaling that the unwinding phase is nearing completion.
Additionally, liquidity risks have not worsened. Indicators such as the yen-dollar currency swap basis remain stable, while assets like gold and U.S. Treasuries have shown no significant distress. The VIX index, which spiked to 65, has since retreated to around 15, reflecting a calming of market panic.
Crypto market completes deep correction, likely to rise gradually
This downturn in the crypto market was largely driven by global de-leveraging rather than intrinsic issues within the crypto space. According to Tide Capital, the rapid de-leveraging process is nearing completion, with futures data showing a decrease in BTC open interest from $37.5 billion to $30.0 billion. The reduction in leveraged long positions has facilitated a healthy market adjustment.
Stablecoins have seen a net inflow, increasing from $171.2 billion to $173.6 billion over the past month. Institutional investors have been buying at lower levels, with notable market maker Cumberland acquiring over 1.5 billion USDT from Tether Treasury and transferring them to major exchanges. With anticipated interest rate cuts in September, the market expects funding costs to decline, further driving investment into cryptocurrencies.
U.S. election uncertainty may cause market to decline first and rise later
The upcoming U.S. presidential election remains a key factor for market sentiment. Polymarket data shows Kamala Harris has a 51% chance of winning, with Donald Trump also remaining a strong contender. The election’s uncertainty is likely to influence market trends in the coming months.
Historically, markets dislike uncertainty, often declining before an election. After the election results are out, markets typically recover and rise. For example, in 2020, both U.S. stocks and BTC began to decline in September. It was only after the November election results were settled that markets surged, with BTC and U.S. stocks reaching new all-time highs.
Tide Capital anticipates a similar pattern this year, with the market potentially declining before recovering as the election results become clear. Regardless of whether Harris or Trump is elected, continued money printing policies are expected to drive both U.S. stocks and the crypto market higher.
Tide Capital
Tide Capital is a research-driven digital asset investment and trading firm. We study macro and fundamentals to capture beta and alpha opportunities from crypto waves to financial tides. Driven by value, we aim to invest in early-stage projects with significant growth potential. Concurrently, we assess market cycles to inform our investment decisions, trading in the public market to achieve returns.
Disclaimer
The information provided in this release is based on publicly available sources. Tide Capital makes no guarantees regarding its accuracy or completeness. Predictions and opinions are subject to change and may differ significantly from actual results. This content is for informational purposes only and does not constitute investment advice. Investors should seek their own legal and financial advice before makin
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