Markets in Full Panic Mode
“The rational strategy in the face of escalating risk is to construct a portfolio of scarce, desirable, and portable assets that you can hold forever.”
- Michael Saylor
Markets experienced a significant turmoil this Monday, largely driven by fears of an economic slowdown in the United States, which was exacerbated by disappointing jobs data released last week.
The Japanese Nikkei 225 index suffered a significant 12.4% drop on Monday, marking its worst two-day decline in history, with a cumulative loss of 18.2%. The index fell as much as 7.1% during early trading hours before closing down 4,451.28 points at 31,458.42. This sharp decline pushed the index into bear market territory, reflecting a broader panic among investors.
In a bigger picture, Japan had a dominant role in Monday’s crash, as many traders have been using Yen (JPY) for so called “carry trade”. The sharp rise in the JPY/USD pair caused a massive unwind of Yen carry trade positions, contributing to the sharp decline in US stocks.
Many traders were borrowing Yen (JPY) at low interest rates, converting them to USD and using them to buy US stocks. The news about Bank of Japan (BOJ) raising interest ratest caused JPY to strengthen significantly against the USD. Traders facing big losses and margin calls started to sell their US stocks to raise USD, converting back to JPY and paying back their loans. This resulted in more selling pressure on US stocks and even more declines in the short term.
The severity of Monday’s huge markdown was mirrored by VIX, a key metric that measures market’s expectations for volatility over the next 30 days. On Monday the VIX hit 65 for the third time in history, only preceeded by the Subprime crisis of 2008 and the COVID crash of 2020.
Cryptocurrencies, considered as risk-on assets, were also heavily hit by the sell-off, leading to bitcoin declining -20%. From a contrarian investor perspective, the crash represents a remarkable opportunity, as it allows you to buy cheap high-conviction tokens.
Overall, bitcoin seems relatively resilient amid the escalating risk environment. As Michael Saylor, the founder MicroStrategy, said: “The rational strategy in the face of escalating risk is to construct a portfolio of scarce, desirable, and portable assets that you can hold forever.”
Wyckoff Structure Still Intact
From a purely technical vantage point bitcoin’s -20 percent drop has been substantial, however the previously explored Wyckoff structure is still intact. In a Wyckoff accumulation pattern institutional “smart money” investors quietly accumulate at favorable prices, absorbing selling pressure from weaker market participants.
Amid the peak selling pressure, bitcoin bounced from the lower Wyckoff support line, staying inside the channel. Despite the sell-off, bitcoin’s realized price still hangs on at 31,253.75 US dollars. The realized price represents the average cost of all bitcoin purchases, indicating that the majority of bitcoin investors are significantly in profit.
Cumulative volume delta (CVD) mirrors a sell-off across most investors segments. In contrast, the retail $100–1K sized orders are growing, indicating retail investors buying the dip.
When Markets Crash, All Correlations Reach Towards One (1)
The phrase above is commonly used in financial markets to describe a phenomenon where, during periods of extreme market stress or crisis, the prices of various assets tend to move in the same direction, leading to a high correlation among them.
The effect is amplified by the elevated role of derivatives market, as a “sell everything” mentality leads to investors rushing to liquidate positions, regardless of the underlying fundamentals of the assets involved.
The increasing correlation was recently mirrored between bitcoin and ethereum, as the pair’s relationship climbed from 0.798 to 0.811 within a week.
Across the spring of 2024, bitcoin was heavily correlated with S&P 500 and Nasdaq Composite indices, reaching a 30-day Pearson correlation of 0.91 with S&P in mid-March.
However, in June the S&P correlation decreased massively, dropping into a negative territory at the turn of the month. Following the “all correlations reach towards one” thesis, bitcoin left its S&P negative correlation territory on Monday, reaching a positive figure of 0.17. Monday also uplifted the previously heavily negative bitcoin — Nasdaq Composite correlation to -0.05.
When the stock market recovers from the recent crash, and finds a positive climb angle again, we might see bitcoin being more correlated vis-à-vis S&P again.
Saylor’s Counter-Cyclical Strategy
Profiled as the de facto Bitcoin institution, MicroStrategy (MSTR) recently announced plans to increase its bitcoin acquisition rate by selling up to $2 billion worth of its shares. The company filed with the SEC to sell these shares, with the proceeds to be used to buy more bitcoin units.
These news comes after MicroStrategy’s bitcoin balance sheet reached 226,500 units, making it one of the world’s largest holders of the asset. However, the company has made it clear they are not done buying, with this new strategy aiming to accelerate their bitcoin purchases.
MicroStrategy employs a dollar-cost averaging (DCA) strategy in its purchases, but has a tendency to cyclically weight its buying program. When spot prices sharply declined back in 2022, the company’s purchases were modest at 8109 bitcoins, while in 2023, acquisitions rose to 56,650 units.
On an annual basis, the growth of MSTR’s buying program from 2022 to 2023 was an impressive 599 percent. This year’s purchases have climbed to 37,181 units, and MicroStrategy is on track to reach or exceed last year’s numbers. The recent purchases, coinciding with a weakening spot price, can be considered as counter-cyclical. In 2024, MSTR has so far accumulated a total of 37,350 coins.
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MicroStrategy’s Purchase Program Summary (BTC)
2022: 8109
2023: 56,650 (yearly increase 48,541 or 599%)
2024: 37,350
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A Trump Coin?
We recently wrote about crypto’s role in (geo)politics and how Donald John Trump and Robert F. Kennedy Jr. (RFK), in particular, have been able to profile themselves as a crypto-friendly candidates.
RFK has been taking a more aggressive approach: If elected, he promised to buy 550 bitcoin units daily until US reaches a reserve of four million bitcoin units. Kennedy’s hypothetical reserve of four million would represent 20.27% of all bitcoins in circulation.
Additionally, RFK has proposed that the Internal Revenue Service (IRS) should issue guidance stating that transactions between bitcoin and the US dollar would be unreportable and non-taxable.
Trump seems to take a bit more moderate approach, stating that he aims to build a 200,000 bitcoin unit strategic reserve. Trump also promised to make United States the “crypto capital of the planet”, and declared that US would become a “bitcoin mining powerhouse”.
Now industry insiders suggest that Trump’s team has been preparing for a “Trump token” launch for at least two months, although there is no official confirmation regarding his direct involvement with the token.
Previously Martin Shkreli, known as controversial “Pharma Bro”, claimed of collaborating with Barron Trump, the son of former President Donald Trump, to launch a new token called DJT.
The token saw a dramatic rise in value shortly after Shkreli’s announcement, and consequently collapsed later when the claims turned out to be untrue. Despite the controversy, Polymarket shows a 22 percent chance for Trump launching his own token before the November election. The new token won’t likely carry Shkreli’s DJT ticker, though.
