On Monday, August 5, 2024, the crypto market suffered a huge and rapid loss. The price of bitcoin dropped below $50,000 for the first time since February 2024.
Other cryptocurrencies with large market capitalisations also followed.
Ethereum, which was trading at $3,386 saw a sharp drop to $2,951 on August 3. This drop continued until August 5, when it reached $2,226.
Similarly, Solana, which has seen a great rally this year, lost a significant portion of its value, going from $190+ to $111.
Overall, the entire crypto market shrunk by $500 billion between July 27 and August 5, 2024.
Interestingly, the market has gained $300 billion in value, and it might be thanks FTX, the crypto exchange that decimated the market after a shutdown in 2022.
Per Coindesk the crypto market showed positive signs after a US judge ordered FTX and its sister trading firm, Alameda Research, to pay out $12.7 billion to creditors.
Why did the market shrink?
The huge market downturn happened because of the US job market data published on August 2, 2024. The report showed that the unemployment rate in the US has reached its highest since 2021.
Three days after the data was published, Japan’s stock market plunged by 12% — its worst dip in 37 years.
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In the US, the S&P 500 — a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States — dipped by 4.5% while Nasdaq dropped by 6%. Some tech companies, with high performing stocks such as Nvidia, dropped almost 27%, Amazon tumbled 18.5%, and Alphabet declined by about 17%.
The crypto ecosystem suffered the biggest loss, a bad sign for the market, especially since the bull run that started in March has begun receding in July.
In that time, CoinMarketCap's fear and greed index, which measures general sentiment in the crypto market, showed that investors were afraid.
Although the index currently reads neutral, it is safe to say the market is not bullish at the moment.
The first major change (greed to fear) in market sentiment came because governments were selling off their crypto holdings.
According to Blockworks, the US and Germany have already sent a combined $737.6 million in bitcoin to exchanges, including Coinbase, Bitstamp, and Kraken.
Investors were also fearful because of an ongoing $9 billion repayment being made to people that invested in Mt. Gox, a bitcoin exchange that fell in 2014.
FTX might help the crypto market
After bitcoin's surprising drop to almost $50,000 on August 5, 2024, it is currently over $60,000. Altcoins (other cryptocurrencies) like solana and ethereum have also bounced back.
This coincides with a court order that will see FTX and its sister company, Alameda, pay out $12.7 billion to customers. The order also bans both companies from trading digital assets and acting as intermediaries in the market.
This came after the crypto exchange crashed in 2022 following its inability to meet customer withdrawals. Founder of the exchange, Sam Bankman-Fried was convicted of multiple counts of fraud and conspiracy in connection with the collapse of the exchange. He was sentenced to 25 years in prison in April 2024.
Interestingly, when this payout was first proposed in May 2024, some customers were prepared to reject it because their money on the platform was dollarised. This meant that gains gotten on assets like bitcoin would not be considered. The dollarisation of their assets was based on the dollar value of the asset when the exchange went under.
About 1,600 customers filed a lawsuit to have their claims valued as crypto assets complete with whatever gains such assets might have gotten.
When FTX crashed in November 2022, bitcoin was trading at a little over $20,000. Today, the flagship cryptocurrency is trading at $60,000, even smashing a new all time high of $70,000 this year.
According to Wired, FTX is only able to repay customers because of the jump in price of cryptocurrencies. But this means that payouts will be about 50% less than their valuation today.
The approval of the $12.7 billion payout has not being countered by any customer. If anything, the news has only helped the market regain some stability. But experts think it might not last.
A research analyst at K33 told Coindesk that it's likely to experience choppy, sideways movement before stabilising. He advises focusing on cryptocurrencies that are showing relative strength.
The crypto market being swayed the same way as the stock market could be an indicator that traditional finance has a strong grip on crypto.
