Rich Rosenblum, co-founder and co-CEO of GSR, stated that the recent cryptocurrency sell-off is partly due to the liquidation of "carry trades" in some financial markets. He expects Bitcoin to rebound significantly, but the exact timing depends on when traders complete their exit from these trades.
Carry trades involve investors holding or carrying assets (such as currencies or commodities) to generate returns over a period. This is most common in the currency markets, where traders borrow currencies from low-interest-rate countries and invest in currencies of high-interest-rate countries.
Rosenblum pointed out that this situation is similar to the early days of the COVID-19 pandemic in March 2020, when some hedge funds involved in cryptocurrencies faced margin calls on other asset trades, meaning banks required more collateral. To raise cash to meet these obligations, funds chose to liquidate their cryptocurrency positions. He added, "We do believe that at some point we will see a sharp rise in cryptocurrency prices, but first, we need to see the shorts cover."
Rosenblum noted that two major trades in traditional asset markets are currently being unwound: yen carry trades and short volatility trades.
For a long time, traders have gained returns by borrowing currencies from low-interest-rate countries and converting them into currencies of high-interest-rate countries. Due to Japan's ultra-low interest rates, the yen has been one of the preferred funding currencies.
However, this situation has recently changed. Last week, the Bank of Japan raised its key rate to around 0.25%, leading to a more than 7% rise in the yen against the dollar. Many carry traders were therefore forced to add margin and had to buy yen to cover their positions, which pushed up the yen's exchange rate and triggered more margin calls.
According to JPMorgan analysts, the unwinding of yen carry trades is only halfway through.
Meanwhile, on Monday, the Chicago Board Options Exchange's Volatility Index (VIX), commonly known as the fear index, surged unexpectedly, catching traders betting on a short-term decline in the index off guard.
Since 2020, strategies betting on a decline in VIX have provided stable returns for traders. However, when VIX briefly soared above 65 on Monday, this strategy was severely impacted—a more than 180% increase marked the index's largest single-day gain ever. According to Dow Jones Market Data, VIX eventually closed at 38.57, the highest closing point since October 2020, with a one-day increase of 64.9%. Subsequently, VIX fell to around 24.40 on Tuesday.
In the cryptocurrency market, a similar carry trade unwinding phenomenon is occurring. Rosenblum noted that some traders were forced to liquidate their positions in Ethereum, Solana, and other major cryptocurrencies. Staking involves investors locking up their cryptocurrencies to secure certain blockchains and earn rewards.
Over the past week, Ethereum has underperformed compared to some major meme coins, such as Dogecoin and Shiba Inu, which are often considered to lack practical uses. Rosenblum said, "This is a sign of high-quality assets being forced out."
The second-largest cryptocurrency by market cap, Ethereum, has fallen by 25.7% over the past seven days, while Dogecoin is down 12.4% and Shiba Inu is down 18.7%.
Bitcoin has dropped 14% over the past seven days, with a current price of about $56,106, which is 24% lower than its all-time high of $73,798 set in March. Ethereum has fallen 26% in the past seven days, with a current price of around $2,392.
