Bitwise CIO on market crash: What to watch next?
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Bitwise CIO on market crash: What to watch next?
Historically, whenever we've seen this kind of global economic panic, cryptocurrencies initially drop but then rise over the following year.
Navigating Web3 tides with focused insightsAuthor: Matt Hougan, Chief Investment Officer at Bitwise
Translation: Luffy, Foresight News
Over this past weekend, the cryptocurrency market saw a sharp sell-off. From 4 PM last Friday to 7 AM Monday, Bitcoin dropped nearly 20%, falling from $63,356 to $51,026. Ethereum fared even worse, plunging from $3,307 to $2,234—a decline of over 30% (note: the author is in a U.S. time zone 12 hours behind Beijing). Since then, there has been some degree of rebound in the crypto market.
Of course, cryptocurrencies were not the only markets to plummet.
Global capital markets have become turbulent due to heightened concerns about recession and geopolitical tensions. In Japan, the Nikkei index just experienced its worst day since 1987, dropping more than 12%. In the U.S., Nasdaq futures fell over 4%, and the VIX volatility index has surged 100% since last Friday.
If you’re like most cryptocurrency investors, you’re likely experiencing intense emotional swings—fear or despair. For many, the most shocking emotion is anger.
"Isn’t cryptocurrency supposed to hedge against global uncertainty? What’s going on?"
I feel the same way. But based on more than six years of full-time experience managing cryptocurrency funds, one thing stands out to me even more strongly: opportunity.
Lessons from the Pandemic-Driven Sell-Off
The last time markets collapsed like this was March 12, 2020. That day, the world realized the pandemic would have major consequences.
In case you’ve forgotten, let me remind you: it was chaos.
On March 12, the Dow Jones Industrial Average plunged 2,353 points—the largest single-day drop since 1987. Tech stocks and commodities both fell sharply. We all thought the global economy was ending. The next morning, the president declared a national emergency.
Among all assets, Bitcoin fell the most, dropping from $7,911 to $4,971—a 37% decline. It was a terrifying crash that erased a year's worth of gains in just 24 hours.
At the time, it felt like we might be finished. The media claimed Bitcoin had failed its test as a hedge asset.
Then something remarkable happened. As global leaders took steps to stabilize economies—cutting interest rates and printing money—Bitcoin began to rise. A year later, Bitcoin traded at $57,332, an increase of over 1,000%.
In hindsight, March 12, 2020 wasn’t a day to panic. It was the best time in a decade to buy Bitcoin.
Looking back, the reasons are easy to understand. Bitcoin didn't fundamentally change because of the pandemic. On March 11 and March 12, Bitcoin’s maximum supply (21 million) remained unchanged. On March 11, you didn’t need to rely on any bank, government, or corporation to store wealth in Bitcoin—and the same was true on March 12.
Meanwhile, the pandemic added further justification for Bitcoin’s long-term rise. It showed that central banks will step in to rescue the economy at the first sign of trouble. It highlighted the limitations of centralized institutions. It reminded us that the future will be increasingly networked and digital.
All these changes suggest Bitcoin’s importance will grow, not diminish. And in the long run, that’s exactly what happened.
Today I see the same scenario unfolding.
Causes of This Market Collapse
I don’t want to spend too much time reviewing the causes of the current market correction. Briefly: weak U.S. economic data released on Friday sparked fears of a global economic slowdown. This triggered panic in Asia, where rapid unwinding of yen carry trades—a strategy aimed at exploiting interest rate differentials—led to a sharp drop in Japanese equities. Additionally, concerns over geopolitical risks in the Middle East are rising, with Iran threatening to attack Israel.
These events coincided with negative developments specific to the crypto market: a major market maker (Jump Trading) ran into trouble, leading to forced liquidation of large positions.
All of this occurred during a low-liquidity summer weekend, further amplifying the downturn.
But watch what happens next: we’re about to see a replay of the pandemic playbook.
Federal funds futures markets have already priced in aggressive action. Just one week ago, Federal Reserve Chair Jerome Powell downplayed the need for rate cuts this year, and markets gave only an 11% chance of a 50-basis-point cut at the September meeting. Now, that probability has soared to 98%. Some are even calling for an “emergency rate cut” before the September meeting.
Target interest rate probabilities for the Fed meeting on September 18, 2024. Source: CME Fedwatch. Data as of August 5, 2024.
So, will the money printers really come back online? If history is any guide, yes. It happened during the pandemic, after the 2010 euro crisis, and again in 2008. If the events of this weekend lead to real economic turmoil, it will happen again.
What to Watch Going Forward
In the short term, the key question is whether the crypto market has bottomed. Sharp corrections in crypto can become self-reinforcing, creating a downward cycle. As prices fall, leveraged traders face margin calls and are forced to sell. We’ve already seen over $1 billion in futures liquidations, and it’s unclear whether we’ve hit rock bottom.
Also, watch the health of companies within the crypto ecosystem. As we saw during the 2021 crisis, extreme volatility can bring down firms with highly leveraged balance sheets. There are already rumors that at least one market maker (Jump Trading) is under pressure, and if contagion spreads, it could prolong the downtrend.
I’ll also monitor ETF fund flows to see whether ETF investors are selling off or buying the dip. These three factors will largely determine our near-term trajectory.
But my real advice is to ignore the short term and look ahead. Bitcoin is a volatile asset—it goes up and down dramatically. It always has, and it always will. This moment once again proves that market timing is foolish.
Bringing a trading desk mentality into crypto is a mistake. You’re investing in a once-in-a-lifetime transformation in how global money works. Resist the urge to watch intraday prices, and instead focus on where Bitcoin could be in one year, five years, or ten years.
When you get your first job on Wall Street, they tell you the four most expensive words in finance are “this time is different.”
Historically, every time we’ve seen this kind of global economic panic, cryptocurrencies initially fall—but then rise over the following year. Maybe this time really is different, but I wouldn’t bet on it. In fact, I’m betting the script will repeat itself.
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