The Japanese stock market fell 12% on Monday, August 5, its worst day in 37 years. The severity of the fall caused losses on stock markets around the world. In the United States, for example, the Nasdaq index fell more than 6%, while the S&P 500 fell 4.25%.
Markets have since rebounded slightly. The Nasdaq climbed 1.5% on Tuesday, while Japan’s Nikkei 225 closed up 10.2% from the start of the day. But the coming weeks could still be eventful.
One of the main reasons for these bear markets is fears of a slowdown in the US economy. US labor market data released on August 2 showed the highest unemployment rate since October 2021, as well as weaker-than-expected job growth. This has sparked pessimism among investors about an impending recession in the world’s largest economy.
US Federal Reserve Chairman Jerome Powell has hinted that an interest rate cut is expected in September. Lower interest rates generally mean cheaper credit and should boost economic growth.
But the slowdown in the U.S. jobs market in July has sparked speculation that the Fed may have waited too long to act. Central banks in other developed economies, such as the Bank of England and the European Central Bank, have already cut interest rates.
Shares of technology companies, in the US and elsewhere, also fell. And cryptocurrency markets also saw a decline. The price of cryptocurrency market leader Bitcoin fell below $50,000 (£39,000) after hitting a record high of $70,000 just a week ago.
Other cryptocurrencies, such as Solana and Dogecoin, have also seen price drops of up to 30% during the same period.
Read more: Making Bitcoin Great Again – What Donald Trump’s Support for Crypto Could Mean for the Industry
Coingecko, CC BY-NC-ND
This cryptocurrency drop has been largely attributed to the same fears of a US recession that caused the stock market to briefly crash. However, from a financial perspective, this contagion effect is particularly interesting.
Cryptocurrency was designed to be independent of any centralized authority. It was meant to offer an alternative form of money and an investment asset that was immune to the flaws of the traditional financial system.
This was already the case before 2017, in the early days of cryptocurrency adoption. According to a study published in 2018, cryptocurrency markets were relatively isolated and “decoupled” from traditional markets.
However, cryptocurrencies have over time become more integrated into the financial system and are no longer immune to the fallout from volatility in non-crypto markets.
Separate research analyzed Bitcoin’s response to US interest rate announcements and found that the intensity of the response to monetary policy news depends on the type of digital asset.
Cryptocurrencies that are closely tied to “money” in their function, such as Bitcoin, are likely to react strongly to Fed announcements. These cryptocurrencies are widely used for financial transactions and are therefore likely to be sensitive to changes in consumer demand and the overall economic environment. Both of these factors are influenced by monetary policy.
In contrast, cryptographic protocols like Ethereum primarily serve as platforms on which various cryptographic products, such as non-fungible tokens (NFTs), can be built. In theory, the price of a protocol should react more slowly and less severely to monetary policy announcements than that of “pure” cryptocurrencies.
However, crypto assets across all categories have seen a unified fall over the past week. The price of Ethereum, for example, fell to its lowest point in 2024 on August 5, showing that financial panic can transmit quickly and efficiently across all markets. The popular appeal of cryptocurrencies for decentralization and independence from traditional finance simply does not hold up.
The value of a cryptocurrency also depends largely on investor sentiment, with social media announcements and news stories playing a crucial role in this process. It is therefore possible that cryptocurrencies will react even more severely to such shocks than stock markets themselves.
Will Cryptocurrency Markets Rebound?
Cryptoassets are volatile, which makes them attractive to some risk-averse investors. Current prices may be low, but crypto investors are used to volatility and, as with every dip, are assessing whether now is a good time to buy.
The problem is that technical analysis, which is the interpretation of upward and downward price trends, is often very inaccurate in any market. And prices can still fall further, given that cryptocurrencies have only fallen below their all-time highs.
Coingecko, CC BY-NC-ND
Early academic research on crypto bubbles concluded that because cryptocurrencies have no fundamental value, the real price of Bitcoin is zero. This idea may seem far-fetched today. But a complete collapse in value remains a plausible future scenario for many crypto tokens.
Any new information, such as interest rate announcements, political events like the US elections, or increased adoption of crypto assets by institutional investors, can quickly change the direction of cryptocurrency prices.
