Crypto Market Overview
The cryptocurrency market has experienced a remarkable surge, with major digital assets recovering from earlier losses this month. Bitcoin, the largest cryptocurrency by market cap, increased by 3.3%, surpassing the $60,000 mark. Similarly, Ethereum climbed by 3.2%. Other notable altcoins, such as Cardano (up 2.7%), Solana (up 2.3%), Dogecoin (up 2.2%), Shiba Inu (up 2.3%), BNB (up 1.2%), and XRP (up 2.1%), also mirrored this upward trend.
Market Caution and Inflation Concerns
Despite this upward momentum, investors remain cautious. A significant concern is the uncertainty surrounding the upcoming inflation report and the Federal Reserve's (Fed) next meeting. The Fed's decisions on interest rates heavily influence economic and financial markets. According to QCP Capital, a crypto trading firm, "Investors are cautious ahead of the US Consumer Price Index (CPI) release this week." The data will guide expectations on whether the Fed will cut rates by 50 basis points (bps) or 25 bps in September.
The CME FedWatch Tool, a key indicator of market expectations for US rate changes, shows a 100% probability of a rate cut at the September meeting. However, the odds are divided between a quarter-point and a half-point cut, with a 55.5% probability for a 50 bps cut and a 45.5% probability for a 25 bps cut.
Yen Carry Trade Risks
Another risk that traders are considering is the unwinding of the yen carry trade. This strategy involves borrowing in yen at low interest rates to invest in higher-yielding assets elsewhere. Although the most severe impacts appear to have passed, there's no confirmed data to suggest that the market is completely stable. According to Richard Kelly from TD Securities, "There is still a lot that can unwind, especially given how undervalued the yen is."
The yen carry trade poses a global asset re-allocation risk that could influence markets for years, affecting over $4 trillion in assets. This could alter valuations and have extensive ripple effects.
Crypto's Identity Crisis: Not Yet "Digital Gold"
The fact that cryptocurrencies were swept up in the broader market downturn earlier this month highlights a critical point: cryptocurrencies are not yet "digital gold." This term suggests a digital equivalent to gold, which is traditionally seen as a safe haven investment. During the stock market turmoil on August 5, Bitcoin dropped significantly instead of serving as a hedge.
According to Bloomberg, Bitcoin's correlation with gold turned negative from July onward. Despite the increasing legitimacy of cryptocurrencies as an alternative asset class, they remain among the first to be sold off by traders looking to reduce risk. As Josh Gilbert, an analyst at eToro, explains, "If investors panic or are looking to deleverage, crypto is often the first asset on the list."
Wall Street is not yet treating Bitcoin as they would gold, a "legacy asset" with a millennia-long track record. Gilbert suggests it's premature to expect institutional investors to view Bitcoin as they do gold. For now, Bitcoin and other cryptocurrencies must overcome their perception as speculative assets to be considered on par with more established investments.
