The Crypto Market Sell-Off: What Happened and Where We Go From Here

Subscribe to get the weekly CIO Memos sent right to your inbox.

By Matthew Hougan

Emotions aside, history suggests that this weekend’s sell-off is a buying opportunity.

Crypto markets sold off sharply this weekend. Measured from 4 p.m. Friday, bitcoin was down nearly 20% as of 7 a.m. Monday morning, falling from $63,356 to $51,026. Ethereum fared worse, tumbling more than 30% from $3,307 to $2,234.

Crypto, of course, is not alone.

Globally, capital markets are shaking from rising economic worries and geopolitical concerns. In Japan, the Nikkei just experienced its worst day since 1987, falling more than 12%. Here in the U.S., Nasdaq futures are trading down more than 4%, and the VIX volatility index is up 100% since Friday.

If you are like most crypto investors, you’re cycling through a brutal swing of emotions, including fear or despair. For many, the emotion that strikes hardest is something like anger.

I thought crypto was supposed to be a hedge against global uncertainty!? What gives?

I feel those emotions too.

But there is one thing I feel more, born from six-plus years of managing money in crypto full-time: opportunity.

Lessons From the Covid Sell-Off

The last time the market melted down like this was March 12, 2020. That was the day the world realized that Covid was a big deal.

In case you’ve blocked it from your memory, let me remind you: It was chaos.

The Dow Jones Industrial Average sold off 2,353 points on March 12, its worst day since 1987. Tech stocks were in free fall, as were commodities. We all thought the global economy was going to end. The president would declare a national emergency the following morning.

Among all assets, bitcoin crashed the worst, falling 37% from $7,911 to $4,971. It was a breathtaking one-day move, wiping out a year’s worth of gains in 24 hours.

It felt as if we might never recover. The media claimed bitcoin had failed its test as a hedge asset.

And then something spectacular happened. As global leaders stepped in to stabilize the economy—cutting interest rates, printing money—bitcoin began to rise. A year later, it was trading at $57,332, up more than 1,000%.

In retrospect, March 12, 2020 wasn’t a time to panic. It was the best buying opportunity for bitcoin in a decade.

It’s easy to see why with the benefit of hindsight. Nothing fundamental had changed about bitcoin because of Covid. The maximum number of bitcoin that could exist (21 million) was the same on March 11 as it was on March 12. You didn't need to rely on any bank, government, or company to store wealth in bitcoin on March 11, and that was still true on March 12.

At the same time, Covid supercharged the reasons for bitcoin’s long-term rise. It showed that central banks would bail out the economy at the first sign of trouble. It demonstrated the limitations of centralized institutions. And it reminded us that the future is more online and digital.

The changes all pointed in favor of bitcoin becoming more important, not less. And in the long term, that’s exactly what happened.

I see the same setup today.

What Caused This Market Meltdown

I don’t want to spend too much time reviewing what caused the current market pullback. There are comprehensive write-ups here , here , and here .

But, in brief: Weak economic data in the U.S. on Friday sparked concerns that the global economy is slowing. This prompted a panic in Asia, where a rapid unwind of the yen carry trade—a strategy aimed at exploiting interest-rate differentials between currencies—pushed Japanese markets sharply lower. Things weren’t helped by rising concerns over geopolitical risks in the Middle East, where Iran is threatening to attack Israel.

These events collided with idiosyncratic negative developments in the crypto market, where a large market maker (Jump Trading) ran into trouble and faced forced liquidations of large positions in ETH.

All of this occurred over a low-liquidity summer weekend, amplifying the move.

But watch what happens next: It looks like we’re about to see a repeat of the Covid playbook.

Already, the Fed Fund futures markets are pricing in an aggressive response . A week ago, Federal Reserve Chair Jerome Powell was talking down the need for interest rate cuts this year, and the market assigned just an 11% chance of a 50 bps rate cut by the Fed’s September meeting. Today, the market has increased those odds to a 98% chance. Some are even calling for an “emergency rate cut” before the September meeting.

Target Rate Probabilities for 18 Sep 2024 Fed Meeting

So is the money printer coming? If history is any guide, yes. It happened during Covid. It happened after the eurozone crisis in 2010. And it happened in 2008. If the events of this weekend lead to real economic unrest, it will happen again.

What To Monitor Going Forward

On a short-term basis, the key question is whether the crypto market has found its bottom yet. Sharp market pullbacks can feed on themselves in crypto, creating a downward cycle that needs to exhaust itself before we bottom. That's because, as prices drop, leveraged traders face margin calls and are forced to sell. Already, we've seen more than $1 billion in futures liquidations, and it's unclear if we've hit bottom. You can watch here to see if forced liquidations slow down.

It's also worth keeping an eye on the health of firms in the crypto ecosystem. Very sharp moves can take down firms with overleveraged balance sheets, as we saw in the 2021 crisis. As I mentioned, there are already rumors that at least one market maker (Jump Trading) is facing challenges, and if there is contagion it could prolong the downward move.

I would also keep an eye on ETF flows, to see if ETF investors sell into this pullback or buy more. Those three factors will say a lot about where we're going in the short term.

But my real advice is to ignore the short term and key your eyes downfield. Bitcoin is a volatile asset, with big ups and big downs. Always has been, and will continue to be for a while. Times like these reinforce that market timing is a fool's errand.

Bringing a trading desk mentality to crypto misses the point. You are investing in a once-in-a-lifetime change in how money works around the world. Resist the urge to look at intraday prices, and focus instead on where bitcoin could be next year, in five years, and in ten years.

When you get your first job on Wall Street, they teach you that the four most expensive words in finance are “this time it’s different.”

Historically, whenever we’ve seen this kind of global economic panic, crypto has traded down initially but ended higher over the next year. Maybe this time really is different, but I wouldn’t bet on it. In fact, I’m betting the other way.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.