On "Forbes Talks," Forbes Director of Research for Digital Assets Steven Ehrlich spoke to Forbes Crypto Reporter Nina Bambysheva about the steep drop in cryptocurrency prices, the drop in Bitcoin value, and what could come next.
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TechTranscript
00:00Hello, I'm Steve Ehrlich, Forbes Director of Digital Asset Research, and I'm here today
00:08at Forbes Talks to talk with Nina Bamysheva, Staff Writer at Forbes on the digital asset
00:13team on everything that's happening right now in crypto and the broader economy.
00:18Hi, Nina.
00:19Hi, Steve.
00:20Great to be with you.
00:22So what's going on?
00:23As we were going to bed last night, the market started crashing overnight, especially once
00:28Asian trading hour started and into the morning, Bitcoin briefly fell below $50,000, I think,
00:34at least twice, although it started to recover.
00:37What's happening?
00:38Right.
00:39We're seeing selloff across various assets, not just crypto stocks, of course.
00:45And with crypto specifically, a lot of it is macro-driven, but there are also some
00:52undercurrents related specifically to the markets and the latest liquidations that we've
01:00seen kind of throughout the summer.
01:03Everyone is talking about the carry trade, of course, with how traders were borrowing
01:10yen at low rates and investing into dollar and other foreign assets and how this trade
01:17is unraveling and that is forcing traders across markets to liquidate.
01:25In crypto specifically, overnight, we saw over 800 million leveraged positions liquidated,
01:32more than 300 million in DeFi positions wiped out.
01:36So, yeah, we're quite not over that.
01:39Yeah, it seems like crypto very much is a tinderbox and loves to take on levered positions,
01:45which basically means you borrow money to make bets worth more than the value of the
01:50capital that you're putting on.
01:52And I think this really sort of speaks again to, in some ways, the immaturity of Bitcoin.
02:00It's supposed to be a safe haven asset.
02:01It's supposed to be the asset, if its value proposition, as it's stated by believers,
02:10is true, it should be one that investors rush to during times of stress.
02:15Like gold, like the dollar.
02:17But that's not actually what's happening here.
02:19I mean, again, it seems like Bitcoin is trading along the lines of the tech stocks, the Magnificent
02:25Seven, which are continuing to decline.
02:27And to me, it still seems like it shows some of the immaturity of the asset class and Bitcoin
02:32in particular, despite the fact that now we've had spot ETFs trading for a number of months.
02:37We had former President Trump address a gathering of thousands at a prominent crypto conference
02:44and has even, I think, somewhat jocularly suggested paying off the national debt with
02:48Bitcoin.
02:49So he's embracing it and making it a campaign issue.
02:51So I think in some ways, this is a nice reminder that this asset class is still very new.
02:57Yeah, right.
02:58And also, institutionalization of Bitcoin is a double-edged sword.
03:02While everyone welcomed the launch of ETFs, that also means that it's something that more
03:10people can sell when the environment changes as to what we're seeing today.
03:16But it's also interesting to note what is happening with Ether specifically, because
03:22it lost quite more than a lot of other major tokens.
03:27I think it's at 25% down since yesterday.
03:33And there is another important factor playing out here, which is Jump Crypto, formerly a
03:42large market maker, liquidating their positions across exchanges.
03:48They have moved over 200 million, if I'm not mistaken, to different exchanges throughout
03:58the past few days.
03:59And there is a lot of talk about them unraveling more over the next few days.
04:06Yeah, Ether is a really interesting case, because the spot ETFs just launched, as you
04:11mentioned, I guess it was two weeks ago or so, very late July.
04:17More than a billion or so has flowed in, but I think the net flows have actually been negative
04:21because of outflows from Grayscale's legacy product, which has excessively high fees,
04:27at least in comparison to the rest of the market.
04:29But as you rightly point out, Ether is down disproportionately higher or more than the
04:35rest of the large scale cryptos.
04:40I mean, Bitcoin, BNB, Solana is actually somewhat even in the last 24 hours, which is pretty
04:45good for Solana's point of view.
04:47And this is one of those cases where I think we have to talk about the macro backdrop.
04:51I mean, you mentioned a lot of these issues really started with Japan.
04:56The country has been plagued for decades at this point in a sort of a disinflationary,
05:02deflationary spiral.
05:04And the government has been trying to find ways to increase inflation so that it can
05:09kind of stimulate the economy a little bit.
05:12The Bank of Japan was kind of caught between Silla and Kyrgyzstan and decided that they
05:15wanted to raise rates to try to increase purchasing power for its citizens.
05:20But that kind of hurt the export economy.
05:22And that's reverberating around the entire world.
05:24The carrier trade you mentioned where like the Japanese yen, which was trading at such
05:28low interest rates, negative interest rates for a while, it was very popular to borrow
05:32that currency.
05:32And then by more speculative currencies like the peso or other assets, it seemed like a
05:37pretty risk-free trade.
05:38All that's now being called in.
05:40And the topics that the broad Japan-based index is down, I think 12% or so, one of its
05:44worst days ever.
05:46The VIX is having one of its worst days ever as well, the fear gauge.
05:50So all of that's happening.
05:52But then it kind of aligns with these more like insular or esoteric trends within crypto.
06:00Before we started recording, Nina, I mean, you were talking to me about some of the big
06:04sales that have happened.
06:06The German government liquidating $2 billion, Mt.
06:08Gox distributions now starting.
06:11On the Ethereum point of view, the Ether perspective, there's also tens of millions of
06:18dollars worth of Ether is being transferred from Jump Crypto to exchanges, which signals,
06:24I guess, either one or two things based on reporting that we've seen.
06:27Either they're actually exiting the crypto business altogether or the crypto market making
06:31business.
06:31I mean, very famously, they were closely entwined with Terraluna, the stablecoin, multi tens
06:39of billions of dollars stablecoin ecosystem that blew up.
06:42And the CEO of Jump Crypto recently left.
06:46So there's questions about that.
06:47Are they just liquidating and moving out of the business or are they using these funds
06:51to cover margin calls?
06:53That's reporting that I've seen.
06:54So there's lots of these big ticket sales that once they hit the market, market debt
07:00is not necessarily able to digest them.
07:03And that has a cascading series of liquidation.
07:06So people have to unwind positions.
07:08And crypto is not an ecosystem that's able to do that in a very calm way.
07:14Right.
07:15And just to add a little bit to what you said, the CFTC is also reportedly probing Jump Crypto.
07:24So an exit of such a large market maker is obviously something very significant to the
07:29market.
07:30Some of those liquidations related to German government selling the Bitcoin they seized
07:37earlier in the year from a defunct movie piracy website and Mt.
07:45Gox distributions.
07:47I think those are not so relevant today because we've kind of been seeing that over the summer.
07:58And that may be somewhat a good sign to those who are following the crypto markets, because
08:05we've now seen such significant pressure from both endogenous events and exogenous.
08:12And the market seems to be recovering in the past few hours a little bit.
08:22What do you expect to happen over the next few days?
08:24What are you looking out for?
08:27Yeah, that's a good question, because I know we've been trying to put some of this in historical
08:33context.
08:34I mean, for people like you and me, we've been through several cycles or several days
08:40like this.
08:41I mean, one that really kind of springs to mind is March 16th, 2020, sort of Black Thursday,
08:46when I mean, I think Bitcoin dropped below $5,000.
08:49And at the market, I mean, everything was basically converging on the dollar.
08:56I mean, that's when we were very much in the throes of the pandemic.
09:00And there were real fears of kind of how the global economy was going to move forward.
09:04I mean, this was a once in 100 year event that was transpiring.
09:10But again, like the market, especially by May, it started coming back.
09:15In crypto, though, we do know what happens.
09:17I mean, ultimately, Bitcoin jumped back.
09:19But by November, excuse me, actually, it came back.
09:25But then over the next couple of years, we started seeing the market go down again with
09:29the collapse of 3R's capital, Terraluna in 2022, FTX, and so on and so forth.
09:34So I do think once all this shakes out a little bit, we are going to see this bounce.
09:42Now, it depends.
09:43Are we looking at a dead cat bounce, or is this going to be a real recovery?
09:46I think the ferocity of this crash lends us to expect a bit of a quick recovery.
09:52But then the real question becomes, are there any big market makers, any big players that
09:57were disproportionately bet somewhere that they're going to get wiped out?
10:01And then that's going to lead to more cascading types of events like we saw in 2022.
10:07The good news is most lending desks, they're not nearly where they were before.
10:11Open interest is not nearly where it was before in the crypto space.
10:14So hopefully, there's not going to be that same type of collateral damage.
10:17But that's what I'm really looking for.
10:18Because financial crashes, I mean, maybe like 1987 notwithstanding, tend to not just happen
10:25in one day.
10:26It's sort of a series of events.
10:27The Great Depression, we always talk about that day in October, but it actually happened
10:34over the course of months.
10:36The crypto come down in 2022.
10:38It took months and cascading events to happen.
10:42Here, I think we're still in a bit of a wait and see mode.
10:46And again, the hope is that the industry learns the lessons from 2022.
10:51It's not quite as entangled as it was before.
10:53And there's more transparency and more resiliency.
10:56So that's really what I'm looking to see.
10:58But in the meantime, I mean, what I expect investors to do is really focus on blue chip
11:04assets, at least in terms of where crypto, where there's a lot of activity, developmental
11:09activity, stability center.
11:13I mean, that's going to be Bitcoin and Ether and so on and so forth.
11:16And maybe some of these edge assets, the meme coins or some of these new novel restaking
11:22tokens and so on and so forth.
11:23Those are ones that might take a little bit longer to recover because those tend to have
11:28much thinner markets.
11:30People use leverage to bet on them and holdings tend to be concentrated in fewer people.
11:36The other hope too, again, I would imagine the ETFs.
11:40It was just a couple of days ago where Bitcoin was at $70,000.
11:44I mean, that coincided with Trump's big speech in front of the conference.
11:48Obviously now, I mean, at $54,000, it's down, I don't know, 20-ish percent.
11:53I mean, that's a much more attractive entry point for people.
11:56And I know Morgan Stanley was reported to just start enabling some of its clients to,
12:00I think, get access to the BlackRock and Fidelity ETF.
12:03So this could be an attractive entry point to kind of climb back up.
12:07The other thing to keep in mind too is I think August tends to be a pretty poor month,
12:11at least in terms of crypto.
12:13I think over the last like 13 August or something, I saw a statistic that eight were negative
12:18and the average of more than double digit reversal during those periods of time.
12:22So all that's happening here.
12:23But I think assuming that there's not going to be news of some big major wipeout, so on
12:29and so forth, that's good for crypto.
12:31Then the big question becomes what's going to happen next with the Fed and the broader
12:35economy?
12:36Because there has been this hope, this expectation.
12:40I've actually said multiple times, and I've written too, I think a misplaced expectation
12:47that the Fed's going to be able to kind of land this plane and deliver a soft landing
12:52for the economy that we were all hoping to.
12:54Obviously, this underwhelming jobs report on Friday scared a lot of people and made
12:59us think that the economy, at least the US economy, is much closer to a recession than
13:04perhaps we were hoping.
13:05And where the US goes, the world tends to follow.
13:07So it's really interesting to see what will happen.
13:09The Fed decided to keep rates steady at its FOMC meeting last week.
13:15They do not meet this week in, excuse me, they don't meet this month in August.
13:21They will be meeting at the end of September.
13:23And it seems like at least according to the CME FedWatch tool, there's growing expectations
13:28of a 50 basis point reduction, but perhaps one or two more later in the year, maybe a
13:32125 BPS reduction between now and the end of the year.
13:36That would be pretty strong.
13:37And there's even some talk about the Fed intervening and not waiting until September to reduce
13:43rates.
13:44To me, that would be a mistake because that would signal panic to the markets.
13:47But who knows what's going to happen next?
13:50I'm curious if you have any thoughts on this.
13:52Right.
13:53No, I also recently checked the FedWatch and certainly the expectations seem to remain
13:59quite high that we'll see a rate cut in September.
14:04But also, I'm curious about what's going to happen to altcoins.
14:09A few sources are saying that we'll never see, a lot of them will never see the all
14:16time highs they've had this past cycle.
14:20I think since Friday, market cap of altcoins has dropped by more than 50 billion, which
14:28is quite significant.
14:29Also, how it is going to continue to affect DeFi, especially with Jump Crypto continuing
14:36to liquidate their positions.
14:39So quite a lot to watch out for.
14:43Yeah, but as always, we're here to help our readers and listeners to navigate this.
14:53Yeah, a good point about DeFi in particular, because these are the times when DeFi protocols
14:58really matter.
14:59For anyone that doesn't know the term, DeFi stands for decentralized finance, basically
15:05exchanges, crypto exchanges that exist as software programs running on top of various
15:10blockchains that anyone can interact with.
15:13And again, through all these liquidations, these DeFi platforms, these exchanges that
15:20we're seeing, as far as I can tell, none have crashed.
15:22None have really experienced problems, even though more traditional exchanges have had
15:28to implement circuit breakers and halt trading because of the ferocity of some of the sales.
15:34So that's pretty interesting.
15:35But yeah, I'm with you too.
15:37And I am curious to see, Nina, if any of these more edge assets, these meme coins, some of
15:42these altcoins, I mean, you and I, along with one of our colleagues, published a pretty
15:46interesting investigation in March where we detailed 20 layer one blockchain tokens
15:53worth at least a billion dollars in market cap that we dubbed zombies.
15:56I'm going to be interested to see how they're continuing to perform during periods like
16:00this, because our assertion in that investigation was that their market caps are pretty much
16:06inflated just by traders and not by actual users.
16:09Are they going to be disproportionately hurt?
16:11And the same, again, will go for other assets that just have less involved, less enthusiastic
16:17or more narrow community groups.
16:19So with that, Nina, thank you for joining us.
16:23Thank you to everybody for listening.
16:24And we're going to be continuing to follow the news here.
16:28Please follow us on Twitter.
16:29I'm at Steven underscore Ehrlich.
16:31Nina's at N. Bamysheva.
16:33You can always reach us at Forbes Digital Assets.
16:36And have a great rest of the day.