Cryptocurrencies recover after Monday's market meltdown. What happened?

Bitcoin (BTC) soared past $56,000 early Tuesday, leading a broader market rebound in Asia as investors capitalised on Monday's sharp price drop. As BTC surged by 6%, marking its most significant 24-hour increase since May, it appeared to spark a market-wide recovery, with Ethereum (ETH) and Ripple (XRP) climbing 8%. Notably, Solana (SOL) led the pack, recovering 31% after the so-called 'Black Monday'.

Even as markets shake off the water from Monday's plunge, traders are left reeling from the impact. What just happened? What to do?

How the bank of Japan caused a worldwide storm

Calling to mind an old saying about butterflies and hurricanes, the sharp decline experienced by the cryptocurrency market can be traced to a seemingly unrelated incident. It was sparked by the rising fortunes of a fiat currency — specifically, a sudden surge in the value of the Japanese yen.

This surge followed the Bank of Japan's unexpected increase in interest rates on short-term government bonds on 31 July, ending a long-standing low-interest rate policy of over 17 years. This slight rise of 0.1% to 0.25% made large yen-denominated loans, which many traders had used for leveraged investments, significantly more expensive. Institutional investors who had borrowed yen at close to zero interest rates to finance other investments, so-called 'yen carry trades', panicked.

This led to massive sell-offs. Japan's Topix 100 index experienced its biggest drop since 2011, while Bitcoin's price in yen plummeted nearly 15%, a steeper decline than its dollar-denominated price on Western exchanges.

The entire crypto market saw a $510 billion drop in total market capitalisation, with the majority of top tokens wiping out their hard-won gains of 2024.

However, the impact went far beyond the crypto sector. Global stock markets took a nosedive as billions of dollars were wiped out, with even tech giants such as Microsoft, Meta, Apple, and Google suffering losses upwards of 5%.

The Japanese yen wasn't the only factor shaking the stock market. The latest US employment figures and monthly job report (released on the first Friday of every month) indicated that the American economy was in weaker health than previously believed. At the same time, the Federal Reserve decided to hold interest rates high at 5.3%, further concerning investors about the state of the economy. Rising tensions in the Middle East contributed to a feeling of unease in the market.

The leverage-fueled trading environment, with open interest peaking at nearly $40 billion, exacerbated the situation, causing widespread liquidations and losses. However, some analysts believe this market correction could be beneficial in the long run, as it forces traders to reduce high-risk positions. There is also speculation that potential rate cuts in the US and Japan might stabilise the markets and potentially lead to a sustained recovery in the crypto sector.

Recovery or recession?

In Japan, the Topix 100 index rose by about 10% as the yen weakened against the US dollar, breaking a five-day upward streak. Futures linked to the S&P 500 gained 1.5%, while the Nasdaq 100 rose by 2.1%. The potential for quicker Federal Reserve rate cuts following Monday's global market downturn has seemingly revived risk appetite among investors.

Despite the recent gains, some market analysts urge caution regarding the sustainability of the rally in major cryptocurrencies. Even if Bitcoin and the crypto sector bounce back after the initial shock, they could still face headwinds due to ongoing pessimism in broader markets.

Crypto traders can't ignore the stock market

Although cryptocurrency was conceived as an alternative to the international fiat currency system and mainstream financial markets, recent years have proved that traditional markets and digital assets are deeply tied.

The recent popularity of spot ETFs for Bitcoin and Ethereum has only strengthened this bond. Institutional investors reacted to the turmoil by offloading spot BTC exchange-traded fund (ETF) holdings, resulting in a heavy trading day on Monday. US-listed crypto products saw $168.4 million in net outflows, bringing total withdrawals to over $300 million for the month.

This means that crypto traders need to keep up to date with the stock market and currency exchanges in addition to crypto, carefully feeling out investor sentiment in the wider economy. 

Catching the rebound: strategies for crypto market volatility

Although the characteristic volatility of crypto markets has traditionally put off institutional investors, the rapid and dramatic highs and lows of digital assets are exactly what makes them exciting for retail traders and enthusiasts. With that in mind, let's look at some strategies, opportunities, and positive indicators for crypto trading in the current market correction.

Buying the dip

During the recent market downturn, large Bitcoin holders, known as whales, increased their holdings, consolidating their positions while smaller investors sold off their assets. Given that Bitcoin has steadily increased in value over the years, hitting new all-time highs after dips, keeping a calm head in a crisis can be an opportunity to snap up BTC or other tokens at a discount.

Options trading

Even if you're pessimistic about prices, you can still profit in a falling market. StormGain offers crypto options trades that allow traders to position themselves to take advantage of price dips. In falling markets, traders can profit from long put options by selling the asset at a higher strike price than its current market value, while short call options generate profit through premiums if the market price stays below the strike price. Additionally, options can serve as a hedge to protect against losses by offsetting declines in the underlying asset's value.

Ethereum could break out to 100% gains

Ethereum is showing a strong rebound from its recent eight-month low, mirroring a pattern from October 2023 that led to a significant price increase. If the current trend continues, ETH could potentially rally over 100% to reach around $4,560, driven by technical indicators and the expectation of US Federal Reserve rate cuts, which may shift investor interest towards riskier assets.

Trade cryptocurrencies with StormGain, the premier platform for all market conditions

For those looking to navigate the volatile cryptocurrency markets and come out on top, StormGain offers an unbeatable trading platform. 

Key features and unique advantages of StormGain include:

• Intuitive interface: Enjoy the easy-to-use platform designed for traders of all experience levels.
• iOS and Android apps: Have convenient access to the top cryptocurrencies on the go.
• Advanced crypto assets: Trade call and put options, crypto indices, and tokenised stocks.
• Competitive fees: Take advantage of low-cost trading to maximise your returns.
• Full suite of trading tools: Employ advanced analytics and tools for market analysis and decision-making.
• Secure trading environment: Get protection from state-of-the-art security measures to guard your assets and data.
• Passive income stream: Use the built-in Bitcoin cloud miner that rewards users with free BTC just for using the platform.
• 24/7 customer support: Rest assured with round-the-clock assistance in multiple languages to ensure a smooth trading experience.

Don't miss out on the opportunities in the cryptocurrency market. Take just a few seconds to sign up with StormGain today and try a demo account to start your crypto trading journey!