Take A Breather From The Doom Porn: Here Is Why The Selloff In Bitcoin Is Now Overextended

Fear, panic, liquidations, margin calls. These are some of the choice words that can be used to describe the ongoing carnage in global equities and cryptocurrencies, including Bitcoin. Yet, akin to a toddler prone to throwing tantrums at the slightest inconvenience, the market has a proclivity to overreact to given stimuli. A case in point: the excesses of the recent AI bubble and the ongoing Fed- and Yen carry trade-driven global margin call.

Records Are Now Being Broken Left, Right, And Center, And Bitcoin Finds Itself In The Middle Of This Maelstrom

We noted yesterday how the activation of the so-called Sahm Rule conditions in the US triggered weakness in Bitcoin and equity futures on the back of growing odds of a recession in the world's largest economy.

Well, today, Asia got its first chance to react to Friday's highly disruptive Non-Farm Payroll report in the US. And that reaction morphed into a full-blown implosion of the so-called Yen-based carry trade. The above X post provides an excellent primer on the mechanics of this carry trade.

Basically, for years, sophisticated investors took advantage of Japan's extremely low interest rates to borrow in Yen and then invest the proceeds in higher yielding assets in the US and other countries. Given the Yen's shallow depreciation trend for decades - a requirement of sorts to keep its export-based economy competitive - such investors leveraged this macro trend to turbo-charge gains.

Of course, this paradigm ended abruptly last week when the Bank of Japan (BoJ) adopted a hawkish stance and materially increased (by Japanese standards) its benchmark interest rate to combat import-driven inflation on the back of an excessively weakening Yen. This policy change made a lot of carry trades unprofitable, prompting some unwinding actions.

Then came Friday's NFP report, which increased investors' conviction regarding the odds of a substantial economic weakening in the US and precipitated further turmoil in assets that were bought by leveraging the Yen-based carry. It is generally believed that these carry trades played an important role in inflating the AI bubble by propelling NVIDIA and other high-flying names to the proverbial stratosphere. These trades also likely contributed to Bitcoin's extraordinary strength earlier this year. Do note that as of November 2023, the Yen-based carry trades were worth a whopping $20 trillion!

This brings us to today's market carnage that spurred the Japanese TOPIX index to close down 12 percent, marking it steepest losses since the Black Monday-induced carnage of 1987. Almost all of Asia closed in the red today, with hefty selling witnessed in South Korea and the tech-heavy Taiwan.

In the US, the VIX - the market's fear gauge of sorts - just recorded its third-highest jump on record. The Nasdaq 100 index is approaching correction territory. The Magnificent 7 grouping of high-flying stocks are collectively down at least a trillion dollars, with NVIDIA alone down 12 percent.

Meanwhile, Bitcoin fell below the $50,000 price level for the first time since February 2024. And Robinhood has halted its 24-hour trading facility due to extensive market volatility. Even Gold is down around 2 percent.

Finally, we note that the 2 yr - 10 yr yield curve has finally uninverted, which is one of the strongest historical signals of an oncoming recession.

Calm Down: Some Of These Moves Do Not Have A Grounding In Fundamentals

This brings us to the crux of the matter. MicroStrategy is often considered a levered bet on Bitcoin itself. Typically, the stock posts 2x Bitcoin's losses during times of turmoil. At the moment, Bitcoin is down ~12 percent while MicroStrategy shares are down ~18 percent. If we assume that MicroStrategy is correctly pricing Bitcoin's weakness, the world's largest cryptocurrency should only be down ~9 percent.

On the macroeconomic front, we note that Friday's triggering of the Sahm Rule conditions was skewed by the lingering effects of Hurricane Beryl, which boosted the unemployment rate by 0.2 percent on the account of temporary layoffs.

Also, for those insisting that the Federal Reserve committed a policy mistake by not reducing its benchmark interest rate last Wednesday, Future Fund's Gary Black has penned a pertinent note, hammering on the fact that the Fed likely had visibility of Friday's NFP report and that the underlying macroeconomic conditions in the US are nowhere near recessionary.

Of course, this analysis does not take into account the disorderly unwinding of Yen-based carry trades that are likely fueling a lot of today's turmoil.

About the author: Writing is my one incontrovertible passion. Over the past six years, he has authored over 2,200 distinct articles on financial and tech-related topics, spanning nearly 1 million words. And he has been a member of Wcctech mobile team since 2025. As an alumnus of the University of Toronto, Rotman Commerce Program, I bring nuance, in-depth knowledge, and a unique perspective to every topic that I cover. When I'm not writing, I'm traveling the world, exploring hidden confectionaries and restaurants as an aspiring food connoisseur.

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