Bitcoin – the largest cryptocurrency in the world.
The release of the U.S. Job Openings and Labor Turnover Survey (JOLTS) shook crypto and stock markets early Tuesday. Prices fell sharply, with major cryptocurrencies like Bitcoin, Ethereum or Dogecoin experiencing a 5-8% drop in a single day, with other altcoins unable to avoid the fallout.
According to the JOLTS report, job openings exceeded expectations by 7.730 million, reaching 8.098 million jobs. This sign of a healthy job market would generally be considered good news. A strong economy should, in theory, boost investor confidence and push markets higher. Yet the crypto market’s response was quite the opposite, with over $200 million in crypto assets liquidated in just one hour. Was this an example of fear selling too much?
Strong US jobs data caused a market sell-off as investors now expect persistent inflation and a lower likelihood of the Federal Reserve cutting interest rates in the near future. This is relevant as rate cuts have been seen as bullish for Bitcoin, with monetary easing weakening the US dollar and increasing demand for risky assets. The digital asset market has benefited significantly from low interest rates, as cryptocurrencies often exhibit more volatile price fluctuations. After the US central bank sharply increased interest rates in 2022 to combat post-covid-19 pandemic inflation, Bitcoin has become less attractive to investors.
Even though the FOMC meeting is in two weeks to decide rates, strong fundamentals in a healthy economy generally encourage a market rally. Yet such a negative market reaction to a positive economic indicator, especially from large financial institutions like WisdomTree, seems counterintuitive. What is behind this behavior?
Excessive dependence on liquidity
No rate cut means less liquidity for riskier markets, including cryptocurrencies and stocks. Due to higher-than-expected U.S. employment data and thus potentially tighter Fed policies, crypto traders are assuming that reduced capital inflows will drive trends bearish. However, this fixation on liquidity may not be as reliable a measure as many traders believe.
Liquidity is important for several reasons: smoother trading, better valuations or maintaining price stability. However, as economist Alex Kruger points out, there is no strong evidence that an increase in liquidity has a direct impact on risk assets; market participants focus on predicting what will happen in the short or long term. Just because a stock is highly liquid doesn’t mean a company’s financial health isn’t important to its price.
In other words, when financial markets prioritize liquidity analysis over the broader landscape, positive economic news can turn the chart negative.
Broader macroeconomic picture
The resilience of the US economy remains a priority for many investors, with inflation persisting and monetary easing out of the question for now. While these dynamics create a challenging environment for cryptocurrencies and other risky markets, a change in political leadership could prove to be enough of a catalyst. With Bitcoin reserve plans and a pro-crypto administration, investors are expecting bullish momentum with Donald Trump entering the White House on January 20.
So was this overselling out of fear? Considering a significant 7.6% decline in the market capitalization of all cryptocurrencies due to liquidity expectations that lack empirical evidence to impact markets like stocks, this can actually be interpreted as excessive .
