Why is the Crypto Market Falling?

The cryptocurrency market experienced a significant downturn, with the total market capitalization plummeting by over 3.5% to approximately $2.31 trillion. This sharp decline has left cryptocurrency market participants grappling with the underlying causes and the potential duration of the current bearish trend. The sell-off has been driven by a combination of factors, including a risk-off sentiment in financial markets, heavy outflows from newly launched Ethereum ETFs, and a wave of liquidations in the derivatives market. 

Risk-Off Sentiment and Stock Market Weakness 

The crypto market's decline mirrors the weakness observed in the US equities market, which has seen a substantial $1.1 trillion drop in valuation over the past 24 hours. The S&P 500 and Nasdaq indices hit multi-week lows on July 25, with the S&P 500 breaking a prolonged growth streak and experiencing a daily drop of 2%. This drop underscores the sensitivity of the index to fluctuations in tech valuations, which have been prone to significant volatility in the event of a tech-led sell-off. 

The prevailing risk-off sentiment has been exacerbated by a decline in the US Dollar Index, which fell by an additional 0.3% on July 25. This weakening of the dollar reflects broader investor concerns and uncertainty about the financial markets. Additionally, US Initial Jobless Claims increased by 235,000 for the week ending July 20, falling short of initial estimates but still representing a rise from previous weeks. Continuing claims decreased slightly to 1.851 million, which may have implications for the Federal Reserve's upcoming monetary policy decisions. 

Despite these developments, the Federal Open Market Committee (FOMC) is expected to maintain its current interest rates during its meeting on July 31, with lower expectations for rate cuts in July. Instead, investors are now anticipating potential rate cuts towards the end of the year. 

Ethereum ETF Outflows Impacting Crypto Prices 

The impact of newly launched spot Ethereum exchange-traded funds (ETFs) has been another significant factor contributing to the crypto market's decline. On their second day of trading, these ETFs experienced net outflows totaling $133.3 million, according to data from Farside Investors. The Grayscale Ethereum Trust (ETHE), which had recently converted to a spot ETF, saw substantial outflows of $326.9 million. 

While some spot ETH ETFs, such as Fidelity’s Ethereum Fund (FETH) and the Bitwise https://in.linkedin.com/company/tribiz-india (BITW), recorded positive net inflows of $74.5 million and $29.6 million, respectively, the overall trend has been negative. BlackRock’s iShares Ethereum Trust (ETHA), which had seen the highest inflows the previous day, gathered only $17.4 million in new investments. 

This pattern of outflows follows a trend observed with previous crypto ETF launches, including spot Bitcoin ETFs, as noted by 10x Research. On July 24, spot Bitcoin ETFs saw modest net inflows of $44.5 million after experiencing net outflows of $78 million on July 23. This mixed sentiment in the market highlights a lack of confidence in sustained short-term growth. 

Derivatives Market Liquidations 

The current market turbulence has been intensified by a significant wave of liquidations in the derivatives market. According to Coinglass, long traders—those betting on a rise in crypto prices—have faced $301.17 million in liquidations over the last 24 hours. In contrast, short traders experienced $35.10 million in liquidations during the same period. The dominance of long liquidations indicates a forced selling of positions by traders who were betting on price increases but were unable to withstand the rapid decline. 

When long positions are liquidated, it forces traders to sell their holdings, often at a loss, exacerbating the downward pressure on prices. This phenomenon has contributed to the overall bearish sentiment in the crypto market, further compounding the challenges faced by investors. 

The recent sharp decline in the cryptocurrency market has been driven by a combination of risk-off sentiment in financial markets, significant outflows from Ethereum ETFs, and a wave of liquidations in the derivatives market. As the market navigates these turbulent conditions, investors remain cautious about the potential for further declines and the underlying factors influencing this downturn. The interplay of macroeconomic data, ETF performance, and derivatives market activity continues to shape the crypto market’s trajectory, leaving participants to adjust their strategies in response to the evolving landscape.