Double Whammy: TradFi and DeFi Collide in August’s Market Meltdown

Photo by Khachik Simonian on Unsplash

It was blood red throughout the markets starting from 5 August 2024 to 6 August 2024. This happened in both TradFi and DeFi. Big, red, long candle can be seen in the charts. It all started on Monday.

At the time, I was waiting for opportunity to buy in for my partner as I had identified a few SG stocks beforehand. While I was at work, I suddenly received news notifications about the market crashing. I decided to do a quick check on charts and yes, there they were.

I then scoured the internet to double confirm this and the news were everywhere!

The US Market
The Singapore Market
Bitcoin

Looking at these, I was feeling excited instead of fearing. I may be the odd one out, but I was looking for the long term. So it was more of an opportunity for me.

Nonetheless, this reminded me of the Terra Luna crash in which I wrote about the lessons that can be learned from the incident, which I think is applicable here. I will discuss the causes, the impacts, sentiment, and also the lessons that can be learned from this 2-day incident.

As much as I didn’t really take news in 100%, I was curious enough as to why such news caused most markets to plunge so much, as much as crashing. Little did I know that it was all because of things happening all at once (or at least in the very close period of time).

Let’s get started!


1. U.S. Economic Concerns

    I think the point’s title pretty much sums it up. From the presidential election, to what I called the “uncertainty” in policy changes, to interest rate, to inflation rate, to prolonged period of market exuberance, to geopolitical tensions. You name it.

    However, one thing that if I am not mistaken, started all was the U.S. jobs report. Even though I saw it, I remember I dismissed it as it being a good sign that the Fed may cut the rate soon. However, I didn’t realise that a few bad events happening almost at the same time causing things to just snow balled.

    The recent weak U.S. jobs report was, perhaps, a surprise for global markets (not for me though), including the cryptocurrency sector. The report showed a significant jump in the unemployment rate, with nonfarm jobs falling well short of expectations. This is deemed as unexpected and investors and traders don’t like something unexpected.

    This data naturally sparked fears that the U.S. economy might be heading towards a recession, and recession spooks just anybody in any asset classes. I believe you would have seen the big shots commenting on the news that “we are not in recession”.

    Obviously, what comes after is the market going down, expected. However, there are some skilled investors and traders out there that actually mentioned it is still a bull case (supported by their own research of course). Personally? I am leaning more on the bull side, at least until 2024.

    But why is a significant jump in unemployment rate seemingly is a bad news? This could lead to reduced consumer spending → decreased corporate profits → slowdown in economic activity, which investors don’t like, especially the wall streets.

    Why does it have anything to do with the crypto world then? Well, at this point, as much as Bitcoin is getting widely accepted and Ethereum is following behind, crypto in general is still seen as something with much risk. Therefore, a reduction in exposure to such high-risk asset is expected.

    So, the immediate market reaction has been one of risk aversion.


    2. Japanese Economic Shift

    This is the next big thing that a lot people actually talk more about. When I dug deeper, apparently the Bank of Japan had decided to raise interest rates by 0.25% (sounds small?). This, on the other hand, has a big impact on global markets, particularly affecting the popular (which I had just learned) strategy called the yen carry trade.

    What is that? The yen carry trade strategy is one where investors borrow yen at low interest rates (it was very low) to invest in higher-yielding assets. I would like to think that people would even do margin and leverage a lot. What this means is that people borrow money at cheap rate and use the money to earn big bucks. This is like borrowing money at 0.1% rate and then go to flip houses and pay back the loan. Can you imagine how much you can earn? Of course the example I had just provided is for easier understanding.

    Because of the news, the yen had seen a sharp appreciation, nearly 10% against the USD in just 3 weeks.

    Yes, if it is not insane, then I don’t know what is. Now imagine, if you had borrowed a lot of money to make even more money, and now because of the yen strengthening, would you earn more or less at the end? You will earn less as you have to pay back more.

    Therefore, many traders were forced to unwind their positions, leading to a cascading effect across various asset classes. Some people say it was one of the worst liquidations of bullish positions this year.

    When selling begets selling, leverages are doomed pretty much, which also means more selling.

    So, when one bad news plus another bad news, is it as simple as 1+1 = 2?

    The ripple effects of this Japanese policy shift have been dramatic. Japan’s Nikkei 225 Index slumped 12.4%, marking its worst session since 2011. This turmoil in one of the world’s largest economies has contributed significantly to the global market uncertainty.


    3. Ethereum Sell-Off Fears

    Not many people talk about this and I chanced upon this news by accident. Apparently, there was what I would call the “ETH fear” caused by one seemingly big crypto division(?).

    Jump Crypto, the cryptocurrency division of Jump Trading, apparently had moved over 120,000 staked Ether tokens to various crypto exchanges which began on 24 July 2024, just a day after the launch of sport Ether ETFs in the U.S.

    Usually when someone unstakes, he/she is either planning to sell or find other opportunities or simply taking profits for the moment.

    As the scale of the transfers was also significant, with an estimated of $410 million being unstaked and about $191 million already on exchanges, the speculation in the crypto community is real. Additionally, Jump Crypto has also moved other cryptocurrencies to exchanges, including USDC, USDT, UNI, and SHIB. This is considered a broad movement across different cryptocurrencies.

    Personally, I can see why this causes a big FUD especially for the Ethereum. The affected assets were all based on ETH blockchain. I mean, I would sweat too if I was deep in crypto especially if one is trading.


    4. Retail Investors

    This is the eventual event that follows. When dumb money sees things are red red, they will follow, either because of fear or panic. This is very common especially when the investors never do enough homework about their own investment. Naturally they will fear much.

    This then became a reason or catalyst for some people, especially those that are already profiting, to take profits too, further pushing the market down.

    However, those smart ones, will either hold or add more which I had seen based on some posts online.


    Lessons

    As much as this event had caused confidence erosion, losses, and a decrease in trading volumes, the smart money has been buying in.

    This August market crash offers valuable lessons for investors:

    1. Diversification: A well-diversified portfolio across different asset classes can help mitigate risk, especially when you don’t know what you are doing (or maybe you shouldn’t dabble in the first place).
    2. Risk management: Employing stop-loss orders and other risk management strategies can protect investments from significant losses.
    3. Long-term perspective: Market downturns are a normal part of the investment cycle. Maintaining a long-term perspective can help investors weather short-term volatility.
    4. Due diligence: Thorough research and understanding of investments are crucial to making informed decisions.
    5. Emotional control: Investors should strive to make rational decisions based on facts, rather than emotional reactions to market fluctuations.

    Wrap-Up

    With that, I hope you continue to do well on your own finances, including your investment. If you find this article useful, feel free to share with family members and friends. If you have any feedback, feel free to provide your comments in the comment section down below.

    Do note that this article is by no means an advice to buy or sell any asset classes or investing. It is merely my own research, opinions and thinking. I am no longer a professional even though I may had one previously. Do your own due diligence.

    Thank you again for reading, stay cool stay safe. Peace.


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