The cryptocurrency market experienced a sharp "flash crash" earlier in the week, marking the biggest sell-off in months. BTC fell by nearly 14% in one day and saw a 20% fall in ETH within an hour. Both have recovered partially but are now lower than their previous weekly price. Investors have also wondered: what triggered that sharp sell-off?
Unlike other market downturns previously, this most recent flash crash has no catalyst associated with it. According to analysts, the reason lies in the fact that various global factors converged and presented the ideal situation for crypto.
1. Global Economic Uncertainties
This week's market hysteria began with a tremendous fall in Japan's stock market, recording the largest single-day loss since 1987. Such a fall was probably as a result of a sudden rise in Japanese Yen interest rates, which made carry traders, who had been borrowing money in Yen to invest elsewhere in higher-yielding assets, panic. Japan's Nikkei 225 recovered most of these losses the following day, but the fears about global financial stability remain.
Another reason is that the Middle East situation does not seem to calm down. Escalation is always feared, and because of this, investors of all asset classes, even cryptocurrency, are very cautious.
2. US Presidential Election Uncertainty
The U.S. presidential election is gaining momentum, making the crypto space even more uncertain. According to recent polls, Kamala Harris and Donald Trump are close competitors, with different approaches toward the crypto industry. Harris, the Democratic nominee, has hired one of her former advisors, who used to be an adviser for Binance, which makes it seem that she may take a pro-crypto position. Trump, at his end, has stated his intentions to make Bitcoin an asset for the "strategic reserve," which demands massive legislative changes.
Both of the candidates seem to be somewhat open-minded about the possibility of connections with the crypto space. This is quite a reassuring factor in cutting down on regulatory uncertainty. However, the market is still pretty cautious because election results are likely to drastically change the U.S. regulatory setup.
3. Bitcoin’s Big Milestones in 2024
Despite recent challenges, 2024 was still a landmark year for Bitcoin. Approval by the US for spot Bitcoin ETFs gave access to the world's cryptocurrency for institutional investors in a more traditional investment vehicle. Launches were impressive and broke record after record as interest in Bitcoin from an institutional point of view was excellent. So, bitcoin witnessed good gains at the start of the year. In reality, as high as 69% was the return since January, outperforming key assets such as S&P 500, NASDAQ, and gold.
The fourth halving event for Bitcoin, which took place in April, only served to strengthen its market fundamentals further. This is because this event decreases the inflationary rate of Bitcoin by lowering the rate at which new Bitcoin is being the same event that has driven the price to appreciate throughout history.
Crypto and Politics: A Growing Influence
Cryptocurrencies have come under the intense spotlight of the 2024 United States presidential campaign. Not surprisingly, the crypto industry had to face several hurdles during the Biden administration in the form of continuous lawsuits against U.S.-based crypto companies. However, with Biden out, Kamala Harris appears to be treading a different path. She has already made contact with some senior executives and other representatives working for leading crypto companies such as Coinbase and Ripple. A newly launched "Crypto for Harris" campaign from Democratic supporters is trying to counterbalance the pro-crypto rhetoric thrown by Trump.
Trump has been able to win a good portion of crypto-informed voters, but Harris's apparent move to ease the Democrat's stance on crypto may redefine the party's relationship with the industry.
What Lies Ahead for Bitcoin?
The flash crash may have spooked some investors, but Bitcoin's fundamentals remain sound. Interest from retail and institutional investors continues to rise, and adoption by governments worldwide adds to its legitimacy as a mainstream asset.
A strong recovery for Bitcoin and other "risk-on" assets will depend on economic indicators, especially monetary policy. The U.S. Federal Reserve may cut interest rates next month, which would be a positive environment for Bitcoin since low rates tend to increase market liquidity and encourage investments in high-growth assets like cryptocurrencies.
While Bitcoin contends with short-term obstacles linked to global economic shifts and political uncertainties, its long-term outlook is promising. With growing adoption, regulatory progress, and its increasing acceptance as a mainstream asset, Bitcoin’s future looks bright. These factors create a favorable environment for investors, whether they choose to buy or sell Bitcoin amid these evolving trends.
Disclaimer: This article is informational only and does not constitute investment advice or an offer to invest. Investments in cryptocurrencies carry various risks and are not likely to guarantee the future return on investments. It's always wise to consult your financial advisor before investing in such a market.
