Bitcoin Sinks to 27-Day Low: What Caused the Drop?

• Bearish sentiment returns as Bitcoin sinks.
• Economic factors continue to make their presence felt in crypto markets.
• Bitcoin’s correlation with stocks keeps the pressure on in the near term. 

Bitcoin slumped on Wednesday and now sits far below March’s all-time high of $74,000. This latest dip has investors scrambling for answers in what was expected to be a bull market .

Bitcoin Shows Weakness

Crypto sentiment remained locked in the fear zone after Bitcoin plunged to a 27-day low of $55,600 on Wednesday. Despite hitting a new all-time high of $74,000 in March, the leading cryptocurrency has struggled to revisit those record levels. Since then, BTC has faced several major sell-offs, the most recent being a 16% drop to $49,200 in early August.

While various factors were cited for the August crash, including geopolitical tensions, analysts largely pointed to the unwinding of the yen carry trade. This strategy involves borrowing yen at zero interest to invest in higher-yielding non-Japanese assets. 

However, the Bank of Japan’s rate hikes in March and July pressured yen-carry traders to sell off their non-Japanese holdings, including cryptocurrencies, to repay their yen-denominated loans.

Although Wednesday’s dip wasn’t as severe as the August sell-off, investors are now searching for answers to uncover the underlying cause of this latest market move.

Yen Carry Trade Not Done

While many believed the turbulence from the yen carry trade had subsided, Bitcoin’s recent price volatility can partly be attributed to its continued unwinding.

Bank of Japan (BoJ) governor Kazuo Ueda stated that the central bank will persist with its rate hike program “if the economy and prices perform as expected” on Tuesday, triggering negative market sentiment.

Former hedge fund manager James Lavish noted that Ueda’s announcement coincided with a sell-off in the Nikkei and the yen strengthening against the dollar. Lavish remarked, “Looks like we are about to find out how much of that Yen Carry Trade is still out there.”

Stock Correlation No Laughing Matter

Another factor contributing to Bitcoin’s dip on Wednesday was the sharp decline in U.S. stocks . The SP 500, Nasdaq 100, Russell 2000, and Dow Jones all experienced significant sell-offs, marking their worst day since early August. 

The most notable event was Nvidia’s $279 billion market cap loss, the largest single-day loss in U.S. stock history. This was linked to a U.S. Justice Department subpoena over allegations that Nvidia violated antitrust laws.

Despite claims that Bitcoin is an uncorrelated asset, data revealed a strong positive correlation with stocks, particularly tech stocks. Since the start of 2024, the 90-day correlation coefficient between Bitcoin and the tech-heavy Nasdaq has risen, reaching as high as 0.46 in May.

Bitcoin-Nasdaq correlation coefficient, per Bloomberg

With investor sentiment leaning towards risk aversion, this correlation is likely to add further pressure on speculative assets like Bitcoin and other cryptocurrencies in the near term.

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