Cryptocurrency experienced significant challenges in November. The ongoing pain extending into December may indicate potential challenges for the stock market moving forward. Bitcoin has experienced a decline exceeding 6% over the last 24 hours, dropping from slightly above $91,000 to approximately $85,600 as of Monday afternoon. The cryptocurrency experienced a significant sell-off late Sunday, declining over $4,000 within a matter of hours, coinciding with the commencement of December trading in Asia. Bitcoin has experienced significant volatility in recent weeks as a risk-averse sentiment permeates the markets. The prevailing risk-averse sentiment is compounded by the latest turmoil in the cryptocurrency market, which is largely attributed to apprehensions surrounding the unwinding of a widely utilized trading strategy. The Bank of Japan has indicated a potential increase in interest rates at its upcoming policy meeting later this month. This development complicates a trading strategy that depends on borrowing the comparatively inexpensive Japanese yen. For years, a profitable strategy for international investors has involved borrowing yen to acquire high-yielding assets such as US stocks or, in this instance, cryptocurrencies. Japan’s interest rates have remained low or at zero, resulting in inexpensive yen borrowing and presenting an attractive opportunity for traders. The phenomenon is referred to as the “yen carry trade.”
However, the Bank of Japan has indicated a potential increase in interest rates, partly to tackle persistent inflation, marking a continuation of the recent transition from years of exceptionally low rates. Yields on benchmark Japanese bonds have reached their highest level since 2008, indicating a market expectation for increased interest rates. As interest rates in Japan increase, this may enhance the value of the yen. The increased cost of borrowing yen diminishes the attractiveness of the carry trade, thereby impacting its profitability. This situation may compel traders to liquidate their bitcoin and stocks promptly in order to settle their loans and mitigate the potential for additional losses. Alongside a sell-off, this may result in diminished liquidity for both crypto and stock markets. “This raises questions about the unwinding of the yen carry trade … which would drain liquidity from the system,” stated Matt Maley, chief market strategist at Miller Tabak + Co, in a note. “Such a scenario would not bode well for the equity markets.” Bitcoin experienced a decline, falling below $84,000 on Monday morning, before recovering some of its losses in the afternoon. US equities ended the session on a downward trajectory: The Dow experienced a decline of 427 points, equivalent to 0.9%. The S&P 500 experienced a decline of 0.53%, while the Nasdaq Composite, which is heavily weighted towards technology, decreased by 0.38%. The recent sell-off in the cryptocurrency market has been extensive, with Ether, the second-largest cryptocurrency by market capitalization, experiencing a decline of nearly 9% over the last 24 hours.
Bitcoin’s decline follows a significant sell-off in the cryptocurrency markets that occurred just weeks prior. In late November, Bitcoin experienced a decline to just above $80,000, representing a decrease of approximately 35% from its peak of over $126,000 reached in early October. The decline in bitcoin resulted in a downturn for stocks, notably impacting the technology sector that had been propelling the market forward. The S&P 500 experienced a decline of nearly 5% at one stage in November, subsequently rebounding and achieving a modest gain for the month. The Nasdaq, characterized by its concentration in technology stocks, experienced its inaugural month of losses since March. Maley stated that markets are “not out of the woods quite yet. The renewed decline in bitcoin could create some real problems for the stock market,” he stated in a note. “If the factors contributing to this decline persist, the year-end rally scenario will encounter significant obstacles.”
In a reflection of the prevailing risk-off sentiment, investors are once more gravitating towards gold and silver, assets regarded as safe havens in times of uncertainty. The price of silver reached an unprecedented peak on Monday as investors acquired the metal, which may be viewed as a more economical substitute for gold. Silver prices have experienced a twofold increase this year, further supported by heightened industrial demand. Advocates of bitcoin argue that volatility is an inherent aspect of the experience. Critics argue that bitcoin is failing to fulfill its intended role as a store of value, due to its vulnerability to significant price volatility. Bitcoin has experienced a decline of approximately 9% year-to-date, in contrast to the S&P 500, which has risen by about 16%, and gold, which has surged nearly 62%. All things considered, the S&P 500 stands at less than 2% below its record high established in late October. December has traditionally been a robust month for markets, and market is positioning itself in anticipation of potential interest rate cuts by the Federal Reserve this month, which may enhance stock performance. Nevertheless, increased volatility may be anticipated as bitcoin remains over 30% beneath its all-time peak, while concerns persist regarding the yen carry trade. “With all of this in mind, we’re still at a key juncture for the stock market,” Maley stated. “The developments out of Japan are generating a degree of uncertainty regarding a year-end rally … thus, the signals indicating a definitive recovery are not yet prominently displayed.”