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Black Monday 2024: Why Did TradFi and Crypto Markets Crash?
Sep. 05, 2024. 6 mins. read.
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Global markets staggered as August's crash, driven by Japan's rate hike and U.S. economic concerns, rippled through TradFi and crypto sectors. Recovery remains tenuous amid recession fears.
Introduction
The cryptocurrency sector had its usual sluggish performance during the summer, exacerbated with a catastrophic one-day collapse which swept across the entire global economy. Let’s analyze that crash and what has happened since.
The crash in August drew comparisons with 1987’s brutal Black Monday Wall Street crash, and took an especially heavy toll on tech stocks and crypto assets, often seen as high-risk high-reward investments. Markets have recovered in the month since, but talk of a recession still roams out there.
Let’s take a look at what happened on the day, what happened since, and why it was so heavy.
The Crash in Broad Strokes
TradFi Markets
S&P 500
The S&P 500 saw a sharp decline, dropping 3% on August 5: its worst single-day performance in two years. This drop extended a losing run that began weeks prior, influenced by fears of a weakening U.S. economy and overvalued tech stocks. Key factors included disappointing earnings reports from major corporations and broader economic concerns.
Nasdaq Composite
The tech-heavy Nasdaq Composite was hit particularly hard, falling more than 6% in early trading before recovering slightly to close down around 3%. This decline was driven by significant losses in major tech stocks, including Nvidia, Apple, and Microsoft. The combined market capitalization of the leading tech companies, often referred to as ‘The Magnificent Seven’, saw a massive dip, losing nearly $1 trillion intraday.
Crypto Markets
This turmoil spilled over into the crypto market, with Bitcoin plunging about 20% in just three days, from $67,000 to just above $49,000. On August 5, the total crypto market capitalization plummeted by $314 billion: one of the most severe sell-offs in recent history. ETH fell 18% and other cryptocurrencies, such as Solana, were even harder hit, with Solana’s price falling over 30% since late July.
Aftermath: The Bounce
The immediate aftermath of the crash saw heightened volatility across all markets. The Cboe Volatility Index (VIX), which measures market volatility, spiked dramatically, peaking above 65 before settling at 38.6 by the end of the trading day, its highest closing level since 2020.
Since the crash we have seen a significant recovery, indicative of a resilient market with real interest. Bitcoin rebounded by over 20%, returning to around $60,000 where it sits now, as investors bought the dip and market confidence slowly returned. The broader crypto market also showed signs of recovery, as recession fears subsided when Japan vowed to not increase interest rates for the remainder of the year.
Investor sentiment was heavily impacted, with the Crypto Fear & Greed Index dropping to “fear” territory.
What Caused The Black Monday 2024 Crash?
Rate Hike in Japan causes Stock Drop Contagion
The Bank of Japan’s unexpected decision to raise interest rates was definitely a big catalyst. This move caused a surge in the yen’s value, causing yen carry trade to unwind – where investors borrow in yen to invest in higher-yielding assets elsewhere. The rate hike also heightened concerns about global economic stability, contributing to widespread market anxiety.
Japanese stocks declined and it spread to other markets, creating a domino effect as investors reacted to global market turmoil.
US Economy Concerns
In the USA, a few factors combined to bring market growth to an abrupt halt:
- a disappointing jobs report exacerbated fears of an impending recession
- The Sahm Rule recession indicator (which its creator later said was open to interpretation) was triggered and amplified fears.
- Weak economic data and the Federal Reserve’s anticipated rate cuts in September created a risk-off sentiment among investors: they sold off riskier assets, including stocks and cryptocurrencies.
- The Federal Reserve kept upping interest rates in an effort to combat inflation. This, coupled with signs of an economic slowdown, heightened investor concerns about a potential recession.
Global geopolitical tensions
Israel’s assassination of a senior Hamas leader in Iran was just the latest potential spark that could set off a broad regional war in the Middle East. Coupled with other conflicts such as in the Ukraine, markets are extremely jittery about geopolitics driving prices down even further.
Concerns over AI market bubbles
Investors in AI leaders like Nvidia have been on the ride of their lives the last couple years, as they saw absolutely mouthwatering returns on investment. There were growing fears that certain sectors, particularly those related to artificial intelligence, had become overvalued and were due for a correction. This played out as expected.
Crypto sell-offs spook markets
Jump Crypto’s significant selloff of Ethereum (ETH) played a crucial role in the market crash on August 5, 2024. This selloff was part of a broader liquidation strategy by the firm, which involved offloading hundreds of millions of dollars in assets. This large-scale liquidation exacerbated the already fragile market conditions, contributing to the sharp declines in cryptocurrency prices.
The firm, which is behind big crypto plays like Solana’s Firedancer consensus mechanism, Wormhole and Pyth Network, was slated on social media for apparently selling over the weekend prior to the crash. Speculation is that it is preparing a war chest for its legal battles with the SEC over its investment in the collapsed Terra Luna project.
The liquidation of Bitcoin holdings by Mt. Gox creditors and rumors of the U.S. government moving its Bitcoin holdings.
Portfolio insurance hedging strategies
Similar to the 1987 crash, the use of computer-based models to automatically buy or sell index futures based on market conditions may have accelerated the sell-off.
Conclusion
Crypto was invented at the end of the major 2008 recession, and since then it’s faced off against a pretty smooth TradFi market. This changed at the Covid-19 pandemic, which battered it at first, then made it soar to all time highs when stimulus money flooded into the space.
Since then, crypto has struggled to deal with any sustained bearish macro-economic conditions, as we’ve seen with its reaction to the Fed’s interest rate hikes. You could argue that the most important dates each month are the CPI number reports and Fed FOMC meetings, where interest rate changes are announced.
Analysts believe we’re not out of the woods, so keep a close eye on markets and de-risk where you can. We have seen the effects of uncertainty on the market when investors respond to economic data and to policy responses from central banks. The potential for further rate cuts by the Federal Reserve will keep affecting market stability in the immediate future, as will ongoing geopolitical tensions.
The dramatic 5 August market crash once again drove home the interconnectedness of global financial systems and the sensitivity of markets to policy changes and economic indicators.
The immediate losses were substantial, but recovery was quick and longer-term impacts depend on subsequent economic developments and policy responses. Investors remain cautious, with many seeking safer assets amid the heightened volatility and uncertainty.
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