Cryptocurrency, especially Bitcoin, has been one of the most top performing assets in the past decade. This has prompted a new wave of traders and investors to discover the new frontier of financial markets, driving them away from US Stocks such as NASDAQ, Dow Jones, S&P 500, and even precious metals such as Gold. However, in the past 3 months, the entire cryptocurrency market has been lagging behind traditional markets which are currently soaring to new highs but Bitcoin remains to trade 20% below its previous all-time high of almost $74,000 since March 2024

On August 5, 2024, a massive liquidation event occurred across all markets due to the Yen Carry Trade unwinding after the Bank of Japan raised its interest rates to 0.25%. Traders who were using the Yen to purchase yield-bearing assets for free due to no interests being imposed. However, the rise in interest rates led to traders forfeiting the use of Yen, causing a cascade to unwind across all markets due to the fears of recession.

Since that cascade, the market has strongly recovered to new all-time highs, except for cryptocurrency. Gold has just recently hit $2,500 per ounce while the S&P500 and NASDAQ almost completely recovered from the dump as if it were nothing. There may be multiple reasons to speculate on why Bitcoin and the rest of the cryptocurrency has been lagging behind traditional financial markets.

Crypto is a risk-on asset

Despite the meltdown from the Yen Carry Trade, the fears of war, turmoil, and recession still remain, causing investors and traders to be cautious on where to place their investments. Cryptocurrency, being a young and speculative asset, is typically one of the first basket of assets a traditional trader would cut losses due to its volatile and unpredictable nature.

Market sentiment

The market sentiment across all traditional markets remains shaky as news of war, global debt, and elections persist. Billionaires traders like Warren Buffet have disclosed that they have sold half of their shares of Apple, hinting on a hedge against recession or perhaps buying the dip. This tells that the traditional markets are bound for a bearish turn of events as it continues to rage on despite the obvious signs of exhaustion.

However, the outlook for cryptocurrency looks to be a bright one as both US presidential election candidates look to integrate cryptocurrency into their incoming administration as a proposal to fix the economy and to integrate blockchain technology in different technological sectors. Despite the positive outlook, there has been a rough selling pressure from venture capitals like Jump Trading continuously selling assets, the German Government selling Bitcoin, and both BTC and ETH ETF outflows coming from Grayscale.

Shifting of liquidity from one market to another

Based on the behaviors of expert traders such as Warren Buffet, we are able to anticipate the coming of TradeFi’s top in their bull run, causing investors to cash out on their gains or capitulate on their losses, suddenly increasing the amount of liquidity in the market. While it would be foolish to assume Warren Buffet, a known anti-bitcoiner, to purchase bitcoin using the pile of cash he has reserved, it is safe to say that there has been an increasing amount of liquidity in the market to be played around.

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In the recent months, the M2 Money Supply has been steadily growing at a sustainable rate, hinting on a possible surge to different financial markets. Bitcoin price and the M2 Money Supply has been observed to have a direct effect on each other as Bitcoin’s price increases shortly yet aggressively after the S&P puts in their top.

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This lagging effect that cryptocurrency has had has been observed on numerous occasions as S&P continues to rise while Bitcoin lags behind, only for Bitcoin to come out on top shortly after the S&P has topped. Out of speculation, this may be the shift of risk appetite from investors to go aggressively for risk-on assets as they are able to sacrifice some liquidity that they have gained from the traditional markets

While we patiently wait for Bitcoin’s well-deserved recovery, it is important to exercise adequate risk-management when dealing with financial markets. While traditional markets are a great way to be exposed to the world of finance in a less volatile way, it is still prone to manipulation and volatility from news. The same goes for cryptocurrency, albeit more volatile and high-risk.