Black Monday: five reasons the crypto market crashed

Transcript

GM good morning welcome to the milroad show The Daily crypto show that's like a hug from your grandma when you're sad and your bags are D bad I'm your host Jay Hamilton and today we're telling you what the f is going on and what's causing this crypto market crash is this Panic time sell it all or what should you do tldr it's not panic time everything's good everybody take a deep breath cuz we've got here to guide us legendary crypto investor Lark Davis Lark how you doing how are your emotions today doing good doing good it's been a wild few days in markets and if you've survived this without getting like

totally liquidated or you know whatever congratulations because this is probably one of the more significant Market events that's happened in quite a long time last time I remember sentiment was this bad was probably the FTX crash or the the covid crash and this was less extreme but sentiment wi pretty extreme mhm yeah and and that leads to a lot of panic and a lot of fear so let's alleviate everybody's fears and everybody's panics and talk about what's going on here so we have five main reasons for this crash and five things that are really setting this up Lark what are those five reasons and then let's jump into each of them yeah so of course Japan is getting everybody very

worried we have to break down that situation and understand what the carry trade is US economic data is spooking the market Market uh we have Trump apparently falling behind a bit in the polls which is making people a bit economically less optimistic we have what's happening in Iran right now and of course as crypto we can't just let all the macro stuff happen we obviously have to have our own specific Catalyst of giant dumping happening from Market insiders so it's been a pretty crazy few days Catalyst wise Perfect Storm event apparently Mercury's in retrograde you know so what are you gonna do oh that was a good one that was a good one okay let's start off with the Japan carry trade because Japan increased

their rates by 25 basis points no big deal you would think right like maybe a little bit of out of what we expected but no big deal and that seemed to be the Tipping Point that really caused this market crash can you explain to us why that is and what happened here yeah total fing chaos from uh basically what is a very small move only a 25 basis point hike in the interest rates in Japan but that caused panic because of what's known as the carry trade so essentially interest rates in Japan have been super low for a very long time what Traders have been doing they've been taking Yen denominated loans at basically zero interest rates

and then going and buying US stocks and US bonds now what happens when the interest rate trates go up sends Panic through the Yen markets the yen versus the dollar collapsed hard what does that do that forces a bunch of people to have to liquidate positions because suddenly they're not making money anymore because the Yen dollar pairing has broken right so these guys all need to get out and so that's what they're doing it's a massive deleveraging event that starts happening everybody rushing for the exits in Japanese markets which means big pressure on us bonds big pressure on US stocks and of course big pressure on Japanese stocks and the Japanese Yen

which Japanese stocks are one of the biggest stock markets in the world that index just had its I think worst two days ever in history in worst single day since 1987 hey poor went out for Japanese investors maam because they had if you were investing in the Nik index it went sideways well down and then sideways for 30 years oh and only only a few months ago did it finally reach new highs by like five or 10% only to crash back down to the basement man that's harsh that's harsh being a Japanese stock investor holy cow so that is a big event that's impacted the market a lot right seems like a small thing but it

has massive reverberations around the world because you have to deleverage a lot of money that was leveraged up I there's there's big firms and and hedge funds and stuff like that all across Asia you know whether it be in Hong Kong or wherever that have been running this carry trade this Yen carry trade right so Japanese investors have been super deep into this and it's a lot of Leverage to unwind we're talking like you know tens of billions maybe more having to unwind here so it's a big event and that would explain why this event which happened outside of crypto nothing to do with crypto also caused a large stock market crash now a stock

market crash is a usually a a more manageable crash compared to a crypto crash we are so much more volatile is there any future risk with the Japan carry trade or is this now done and we can put this behind us I think there's future risk with basically everything we're going to talk about today because often what you see happen is there's a big initial spark right and what then happens is you find out who got hit and that's not always immediately apparent if we go back to like the 2022 crypto crisis right we started having different things starting to break and it took us maybe six months or more actually FTX

was in November and things started breaking in like February it took a long time to find out who was swimming naked but there were a lot of players swimming naked whether it was the big lenders whether it was FTX whether it was Genesis or others we saw a lot of those things come to light but only later when the calls started coming in when the insolvency realities starting hitting and the bankruptcy started hitting so none of that stuff happened off the initial spark of a market downturn or the initial spark of the deleveraging those things came later so in terms of Japan hey look maybe maybe they pulled it off perfectly and no hedge funds are going to get taken out or any of that kind of stuff but usually in these sort of events you see that happen and it

doesn't happen immediately we have to wait weeks or months for these things right okay so maybe some more bleeding still to come I hate to say it but that's the truth in these situations okay let's go to the second reason why this happened the US economy what's going on there so the one thing that really spooked people in the US was a bad jobs report so basically unemployment came in it was expected at 4.1% came in at 4.3% not huge not a huge number right total number of us jobs is actually up right versus pre-co numbers so six million more jobs or something like that and if you look across different data even the the jobs the unemployment report even that the the lady who made this something called the S rule which

is basically when the US unemployment data hits over like a 24mth moving average that generally signals that we're either in a recession recession is coming like ASAP anyway even she said look it's not perfect because we have illegal migrants that are potentially part of this number or we had like this big hurricane in Texas so their job report reporting data was not completely accounted for and they might have been quite good there so there's different things to take into account here but it's heading in the wrong direction essentially and it's making everybody in the market think that it's too little too late for interest rate cuts and that when the interest rates get cut it's not getting cut because job well done it's getting cut because holy crap we have no other

choice everything's going to heck in a hay basket here so this is kind of what looking at right now that jobs report is being looked at as sort of the canary in the coal mine that the US economy is actually weaker than it's currently being presented and in spite of 2.6% GDP growth last quarter which is crazy to think we went from that GDP growth report dropping like a week ago two weeks ago to suddenly everybody's freaking out saying imminent recession everything's bad and of course now we have the yield curve un inverting which historically has signaled a recession as well so recession fears are running high in the USA right now Goldman Sachs though came out and said well we're going to raise our recession probability for the next 12 months from 15% to 25%

so one of the biggest banks in America whether you can trust them or not is currently saying well it's only one in four chance of recession in the next 12 months everybody's kind of freaking out a bit too much about this so whether we can believe the banks or our lion eyes and what's happening with the yield curve and all this other stuff remains to be seen but that fear is definitely driving the downturn in the market everything has to happen at the same time you can't just get to oh no we can't just do Japan D leveraging we have to also do US economic fears too and all the rest of the stuff we're going to talk about it's just more fun when you bring everybody to the party I don't want to be at the party just with you know alone I want I want everybody there

so who else joing the party is Trump and Cala is now even with Trump in the polls what's going on there that's obviously causing some more fear as well absolutely and not to get political we just talked about the implications for crypto markets specifically maybe the economy a little more broadly markets tend to believe that Donald Trump's going to be much better on the economy and that he's going to be much better for the cryptocurrency markets now the mainstream media polls I don't believe those for a second but what you can perhaps take a little bit more stock in is the prediction markets but now that all the big money knows that we're all watching the prediction markets over

on poly Market maybe they're gaming that too it's hard to say but the prediction markets are showing Cala picking up steam and if we get Cala Harris the implication that a lot of investors are looking at is that she's not going to be great for the economy and that she's not going to be great for crypto specifically so while we've had this broader selloff over the weekend related to what's going on in the macro markets this is also starting to weigh heavy on the minds of cryptocurrency investors if Trump is not the next president then that could have bad implications for where crypto goes and I know Kamala has been trying to do like a a crypto relations reset but but we have to look at the evidence of the administration and what

the administration that she's a part of has actually done to crypto and it's been the most aggressive Administration you could possibly imagine going after suing every major Exchange in the United States operation choke point 2.0 trying to kill banking access to crypto exchanges and all this other stuff so that's been part of her Administration which makes people think that even if she's now talking the talk that she's not going to walk the walk later whereas no Trump wasn't perfect on crypto in his term either but people are thinking well maybe now he's actually been orange pilled um and his vice president holds Bitcoin and he owns ethereum he sells nfts so maybe they're actually going to deliver and walk the walk so that's kind of what the Market's looking at right now in terms of how

they're reacting to the polls and who could or could not be the next president so with those two factors or catalysts for this current crash nothing has changed the election is still in November we still don't know who's going to win right and we still don't have a rate cut and we still think it's very likely we're going to get a rate cut at the next event but yet the fear is causing all this Panic which is leading to all these sell-offs just that it it's important to always recognize I think and I think you agree with this the what is actually fundamentally changed which versus what is just causing fear and panic and some emotions to lead the

markets to have a correction would you agree yeah absolutely absolutely these markets are heavily emotionally driven and you might think okay well surely these giant institutions and hedge funds they're all like Warrior monks went no they they're susceptible to the exact same things they make the exact same dumb bets that we all do they leverage up they take risks all this kind of stuff and that all has implications when deleveraging comes yeah okay let's go to the fourth Factor Catalyst here for this crash which was the threat of War which is obviously incredibly scary uh what happened over the weekend there yeah so essentially what happened last week you had Israel taking out some top leaders from Hamas

and Hezbollah including a strike inside of Iran itself which obviously pissed off the Iranians so they are now promising massive retaliation and I've seen reports going back and forth all weekend about you know diplomats from the USA and diplomats from the Arab countries all trying to fly in to deescalate the situation because nobody wants a wider regional conflict that's good let's hope that those efforts bear fruits I hope that we're not going to see any sort of massive retaliation uh probably you'll see a lot of what we've seen before which is they'll escalate in their own ways attacking bases or whatever I don't know we'll see it's a volatile situation and unfortunately Hot Heads can Prevail you have a lot of very

hardliners inside of well both these countries who are very much at odds with each other and not talking with each other and the implication here unlike for example uh Afghanistan which wasn't a major oil producer right so when that war happened well you know Afghanistan what are you going to do sorry about your bad luck whereas with Iran if we have a major conflict Brew up that actually turns into a wider conflict and drags in the major Powers we already see Russia shipping weapons in what happens if America needs to get involved the potential implications here and look I'm not an expert in the exact situation here okay I'm just sharing with you guys what what I've been seeing here but the implication if that is to happen is that the Straits of hormo right where all the

oil comes out about 50% of the world's oil or 40% of the world's oil passes through there every single day and Iran is one half of that so they have 15 % or something the world's oil reserves 15% of the um approximate numbers here right of daily Global Production so this could really hit oil markets that could hit inflation right inflation could Spike back up meaning interest rates could stay higher for longer because the job's not done yet again big implications if things kick off there let's hope that cooler heads do Prevail and we don't see these disruptions to the energy markets yeah no kidding holy gez uh okay crypto did play a small part in this crash it wasn't just these four non- crypto

catalysts that caused this our fifth catalyst is a crypto Catalyst what what happened on the crypto side well besides the massive deleveraging of open interest we've seen billions liquidated over the last 72 hours part of that is just things deleveraging both in terms of derivatives trading but also onchain loans and stuff like that part of the reason why I unfortunately was forced to sell a little bit of my portfolio it's funny because my liquidation levels were very very low we didn't get even close to those but just the paranoia and PTSD of what's happened in previous crashes said you know what got to take the hit here got to deleverage I'll sleep a lot better at night so we see huge deleveraging across the crypto space because of these kinds of situations but then then all this bad news all this bad

stuff happening at the same time and in comes Genesis and in comes jump trading now jump trading they were a major Market maker in crypto markets they made a deal with the cftc because of various bad behavior around Luna and the US stablecoin and I'm not exactly sure on all the details but essentially they were doing some bad okay so as part of their settlement deal they agreed to shut down their Market maker business that means that they have had to sell huge amounts of cryptocoins reaching a peak actually over the weekend now they've sold half a

billion dollars or more of ethereum but a few hundred million of that was sold over the weekend so over the past weeks they've started selling but they rushed into the weekend I guess see sensing weakness in the market and want to get out better prices so they rushed in and dumped hundreds of millions of dollars of etherium into a very weak Market which of course send prices going even lower causing more cascading effect then in comes Genesis now Genesis these are the trading desk and Market maker company from the digital currency Group which is the people behind grayscale this was one of their other businesses which I'm not sure if they've sunsetted that business completely or not but anyway Genesis back in 2022 got in a

whole bunch of trouble with a whole bunch of different things risking everybody's money and they had a bunch of money locked up uh from Gemini for example so Gemini people were Gemini customers from The Exchange were lending out their cryptocurrency assets Genesis was the counterpart to that they were not using great risk management a lot of money has been tied up for a lot of time that money is finally starting to be redistributed back but that's another billion billion and a half something like that injection of money into the market at a terrible time to be injecting that money into the market so crypto right not cash but crypto coins getting back to people so yeah that had a a bit of an impact as well probably the least impactful of the things we talked about was Genesis but um

certainly taken all together it's had a real impact on the emotional state of the market and the Russ the the rush to deleverage oh boy okay so are we gonna make it are we okay Lark is this Panic time or is this is this the end or is this just another another 30% drop or 20% drop in a regular crypto life we are going to make it crypto is not going anywhere okay that's the first thing to understand look if you've been overly leveraged I hope you didn't get washed out okay I had to make some tough calls in the last few days regarding my leverage positions that's my own fault got to own up on that got a bit greedy

right but but if you've had cash sitting on hand this has been a very interesting time to be acquiring right historically such massive fear events have been decent times to add to your positions right so that doesn't mean you have to go in or go crazy or anything like that but overall overall these kinds of heavily oversold conditions can be good opportunities for longterm holders right long-term spot Holdings going to be a nice entry for you here with the caveat with the caveat that we still have probably some economic damage to play out from all the stuff we've been talking about today these things may not

have resolved themselves and US recession fears are probably only going to continue to heighten so that could still weigh heavy on markets so don't rush don't rush one of the biggest mistakes I've seen over the weekend every influencer and their mom is out there Rush saying buy the dip byy the dip by the dip when there's very little strength showing in the market everybody's buying into weakness catching those falling knives piling into altcoins am of people I saw on Friday or Saturday morning say oh I'm going buying bunch of this altcoin then like 24 hours later you're down 50% or ready man so you don't have to rush here okay you can wait for the market to start showing you some signs of strength

again all the majors I think at this time are trading under their 200 day exponential moving averages that's not great right you want to see that recover quickly you want to see a decisive recovery for that and see a bit of strength build back into the market so I know the Temptation will be to rush for a lot of people to try to get back in as soon as possible and these things can retrace pretty quickly go back and look at the covid crash right that Trace pretty quickly but that's going to require some some big statements we need the the Federal Reserve to come out and say hey we see what's going on we're going to you know now intervene here however keep in mind that when the Federal Reserve set out on this path of interest rate hikes the intention has always been to break things it's been to

cool everything down that's the intent of this right the intent was for people Los losing their jobs economic slowdown all this kind of stuff and some deleveraging has this been enough or are we going to now face more dire consequences there's a lot of moving parts and everything we've talked about look how many moving Parts there are as an investor how many things you have to be paying attention to in the market it's absolutely crazy the long-term value investors will do well I love it Lark thank you for your cool head in a time of Challenge and thank you for sharing your own struggle through this I think we don't have enough of people we're not all Geniuses here even those

of us who are in this every day we all make mistakes and you're not alone if you had a tough weekend don't worry you're not alone keep your head high keep your emotions on straight uh and let us know if there's anything we can dive into more that you want to learn more about that we can help with your investment strategy feel free to ask we got Lark back on the show next Tuesday so let us know and we'll be sure to ask Lark then Lark thanks so much again for joining us today thanks for having me on remember guys we're going to make it crypto's not going anywhere what are you most worried about with your crypto Investments are you worried about interest rates are you worried about the US economy about the upcoming election about the threat of war in Iran or about

jump trading Genesis or other crypto Black Swan events let us know in the comments in today's show at the same time while you're at it smash the like button hit subscribe whatever you can do to help us get more people to view the milroad show only is going to help you because we're going to on board more people in a safe and responsible way thanks so much for listening in folks now remember none of this is financial advice investing in crypto is risky and you should only invest what you can afford to lose see you next time and have a wicked awesome day