Key takeaways:
Capitalize on recent crypto market changes, with $527M in liquidations over 24 hours indicating increased trader caution.
Decreased liquidity and rising AI debt concerns lead traders to exit risky assets, contributing to a market downturn.
The cryptocurrency market experienced a downturn on Monday, with Bitcoin (BTC) revisiting the $85,000 mark and Ether (ETH) falling to $2,900. Traders grew more risk-averse following a survey that highlighted deteriorating economic conditions in the U.S. and shifts in investor expectations regarding the potential next US Federal Reserve Chair.
The robustness of the US 5-year Treasury after a low of 98.64 on Wednesday suggests traders are seeking inflation protection, especially as the Fed lowered interest rates. The “One Big Beautiful Bill Act” extended tax credits and raised the US debt ceiling by $5 trillion, complicating matters further as the Fed decided to increase its balance sheet by $40 billion per month.
Concerns remain in the consumer sector, with a CNBC survey revealing that 41% of Americans plan to cut holiday spending this year, up from 35% in 2024. Moreover, 61% of respondents reported affordability issues amid stagnant wages and rising prices. US retail sales data for October will be released on Tuesday, along with November nonfarm payroll figures.
Excessive leverage remains a significant concern in the cryptocurrency market, with futures open interest at $135 billion. Over $527 million in bullish leveraged positions were liquidated in the past 24 hours, causing traders to be wary of further losses. Weakness in the AI sector has also prompted traders to increase cash holdings, moving away from risky assets like cryptocurrencies.
Hedge Fund giant Bridgewater Associates has reportedly indicated that tech companies’ heavy reliance on debt to fund AI investments has reached a precarious stage, according to Reuters. “There is a reasonable probability we may soon find ourselves in a bubble,” noted Bridgewater’s Co-Chief Investment Officer Greg Jensen.
Demand for leverage on short (selling) positions surged on Bybit, pushing the annualized funding rate into negative territory. This rare condition, where longs (buyers) receive payments to maintain their leveraged positions, typically does not last as arbitrage opportunities arise. However, since the crash on October 10, liquidity has tightened significantly, leaving some market makers facing substantial losses.
Part of Monday’s decline in the US stock market can be linked to reduced odds for Kevin Hassett to succeed Jerome Powell as the next Fed Chair. CNBC reported that President Donald Trump’s inner circle has advocated for a candidate viewed as more independent. Trump mentioned on Friday that Kevin Warsh would also be an excellent option, alleviating concerns regarding the US dollar’s stability.
The US Dollar Index (DXY) found support at the 98 level after four weeks of decline. This stability indicates increased confidence in the US government’s ability to avert a recession, which may bolster the stock market but could be detrimental for cryptocurrencies.
Related: Bitcoin to $40K? Macro analyst Luke Gromen turns bearish on Bitcoin
Bitcoin and Ether are often viewed as part of an independent financial system, thus a stronger US dollar reduces the demand for alternative hedges. The combination of excessive leverage in the cryptocurrency market and broader macroeconomic uncertainties will likely continue to exert downward pressure on prices.
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