Crypto Fundamentals #89

This week, Ripple Labs ordered to pay $125 million in settlement with the SEC (Yahoo Finance), Celsius sues Tether for $2.4 billion (Tether), the SEC subpoenas three crypto VCs (DL News), pump.fun will make creating coins completely free (X/pumpdotfun), and Brazil’s SEC approves the first Solana ETF (Coindesk).

🌞 DeFi remains resilient during major market downturn and volatility

💫 Jupiter governance votes on major tokenomics change

Despite the massive market meltdown early last week, most crypto assets recovered to end the week relatively even. A reminder that two weeks ago, major crypto assets ended the week down an average of 11%. Last Monday, ETH dropped over 20% in value in just a day as broader market fears strongly affected risk assets. According to Coingecko data, the overall crypto market lost nearly $400bn in value going into Monday (CNBC). Surprisingly, most assets recovered quite strongly throughout the rest of the week. Notably, several assets ended the week positive, including SUI which saw a 50% price increase W/W, on news that Grayscale had launched their Sui Trust (X/Grayscale). ETH still ended the week down 10%, struggling to recover the week’s early losses, while BTC recovered fully.

There were several factors at play that led to the crypto market’s nearly 20% selloff.

1. Macro/Japan: The Bank of Japan decided to raise interest rates for the first time in decades to 0.25%. From 2016 to 2024, Japan actually had negative interest rates. This means that it was really cheap to borrow Japanese Yen, convert it to other currencies and earn yield somewhere else on the cheap, borrowed capital. This is known as the yen carry trade, and has been immensely popular with Japan’s low rate environment, especially when coupled with a weakening yen. However, this changed when the BoJ announced an increase in rates, causing the yen to strengthen, and forcing big leveraged investors to de-leverage and shed other stock and bond holdings. Japan’s Nikkei index saw its worst losses since 1987’s Black Monday, dropping 20% in just a few days. For a more in-depth explainer of the yen carry trade, see this great video.

2. Macro/USA: As we covered in last week’s newsletter, the US’ jobs report came in much weaker than expected, indicating the US economy is slowing. This triggered recessionary fears as the Sahm Rule was activated. Last Monday, Wall Street’s ‘fear index’ (the VIX) had its greatest single day increase in history, greater than its jumps during the 2008 financial crisis, and 2020 COVID crash.
3. Other: Jump Crypto appears to be selling out of its crypto positions and exiting the crypto marketmaking business. Kamala Harris is leading in prediction markets, and does not seem to be ‘resetting’ with crypto companeis as expected. The war in the Middle East was showing signs of serious escalation over the weekend.

The combination of all of these factors at play at the same time led to extreme fear in the markets, manifesting itself in the largest selloff of the year.