Analyzing the impact of the Nikkei Index and US stocks on the cryptocurrency industry

In today's increasingly interconnected global financial markets, the relationship between traditional stock markets and the emerging cryptocurrency markets has garnered widespread attention from investors and analysts. This article will analyze the recent "8.5 Coin Disaster" event and the relationship between the Japanese economy and the global cryptocurrency market, revealing the driving factors behind these complex market dynamics.

1. Analysis of the "8.5 Coin Disaster" Event

1.1 Event Overview

On August 5, 2024, the global financial markets experienced a "Black Monday." The Asia-Pacific stock markets were hit hardest: the Nikkei 225 index plummeted by 12.4%, falling below the 32,000-point mark, reaching a new low since November 2, 2023; the South Korean KOSPI index dropped by 8%, triggering a circuit breaker that forced a 20-minute trading halt.

Image Source: TradingView

The cryptocurrency market, operating around the clock, was certainly not spared from the turmoil. Bitcoin fell sharply from a high of $59,000 to $48,000, with a single-day drop of 18.6%. Ethereum's performance was even more severe, crashing from around $2,700 to $2,070, with an astonishing daily decline of 22.2%. Other altcoins faced even greater selling pressure, with most coins experiencing declines between 20% and 50%, leading to a bleak market atmosphere.

Image Source: TradingView

1.2 Triggering Factors

The immediate trigger for this sharp decline was the release of weak economic data from the United States. In July, the U.S. added only 114,000 non-farm jobs, far below the expected 175,000, while the previous value was revised down from 206,000 to 179,000. Meanwhile, the unemployment rate rose to 4.3%, exceeding both expectations and the previous value of 4.1%. According to the "Sahm Rule," when the 3-month moving average unemployment rate rises by 0.50 percentage points or more from its lowest point in the past 12 months, it is typically seen as a signal of economic recession. The release of this data indicated that this metric had been triggered, raising market concerns about a recession.

Additionally, rising geopolitical risks, persistent inflation pressures, and uncertainties in global central bank monetary policies were also significant factors contributing to this decline.

1.3 Market Reaction

The market's reaction to this downturn was swift and severe. First, a large number of investors engaged in panic selling, opting to cut losses, which led to a snowball effect of selling pressure. Compounding the situation, the well-known market maker Jump Trading conducted large-scale sell-offs on the same day. Although part of this was related to their obligations, their choice to exit at high levels also reflected their judgment on market prospects. Thirdly, many leveraged positions were forcibly liquidated, further exacerbating the price decline.

There were also contrarian investors, as monitored by on-chain analyst Yu Jin. A new address suspected to belong to Justin Sun purchased 16,236 ETH using 37 million USDT in the past three hours, with an average price of $2,279.

1.4 Short-term and Long-term Effects

l Short-term Effects:

Investor confidence is shaken: The sharp decline severely impacted market sentiment, potentially leading to a contraction in trading volume in the short term.

Regulatory scrutiny: Such extreme market volatility may attract more attention from the SEC, potentially accelerating the introduction of related policies in the short term.

l Long-term Effects:

Market cleansing: This decline has cleared a significant number of leveraged positions, benefiting the long-term healthy development of the market.

Valuation reset: It has provided more attractive entry prices for some quality projects, potentially attracting more long-term investors.

Increased risk management awareness: This event will prompt investors and project parties to pay more attention to risk management.

2. The Relationship Between the Japanese Economy and the Global Cryptocurrency Market

2.1 The Impact of the Japanese Economy on the Global Cryptocurrency Market

As a major player in the world economy, Japan's economic policies and market trends have significant impacts on global financial markets, including the cryptocurrency market. The following aspects are particularly crucial:

l The impact of a low-interest-rate environment:

Japan has long implemented low-interest and even negative interest rate policies, creating a unique investment environment for global investors. This low-cost borrowing environment encourages "arbitrage trading," where investors borrow low-interest yen to invest in high-yield assets, including cryptocurrencies. The low-interest rate policy has also driven global liquidity expansion, indirectly increasing demand for high-risk assets (such as cryptocurrencies).

Image Source: Macromicro

l The spillover effects of monetary policy:

The Bank of Japan's monetary easing policy has a significant impact on global liquidity. When the central bank releases liquidity, some of the funds may flow into the cryptocurrency market, driving prices up. Conversely, if the BOJ tightens its policy, it may lead to a contraction in global liquidity, putting pressure on cryptocurrency prices.

l Japan's role as a pioneer in cryptocurrency regulation:

Japan is one of the first countries to establish a clear legal framework for cryptocurrency trading. Japan's regulatory policies are often seen as a reference by other countries, so changes in its policies may influence global cryptocurrency regulatory trends.

2.2 The Correlation Between Nikkei Index Fluctuations and Bitcoin and Major Tokens

Although the Japanese economy has some influence on the global cryptocurrency market, the direct correlation between the Nikkei index and Bitcoin and other major cryptocurrencies is not significant.

Historical data analysis shows that during past cryptocurrency bull markets, there was no significant correlation between the Nikkei index and the price trends of major cryptocurrencies. Statistical analysis indicates that the correlation coefficient between the Nikkei index and Bitcoin's price is usually below 0.3, indicating a weak association. Moreover, the Nikkei index primarily reflects the operating conditions of large Japanese companies and investor confidence in the Japanese economy. In contrast, the cryptocurrency market is more influenced by global technological innovations, regulatory policies, and speculative sentiment.

Additionally, as a mature market index, the daily volatility of the Nikkei index typically ranges from 1% to 2%, with its main participants being institutional investors and long-term value investors. The daily volatility of major cryptocurrencies can reach 10% or even higher, reflecting the high-risk characteristics of the market, with a more diverse set of participants, including a large number of individual investors and venture capital.

In some cases, the Nikkei index and cryptocurrencies may experience significant fluctuations simultaneously, but this is usually caused by common macroeconomic factors or global risk events rather than a direct correlation between the two. For example, the 805 event was likely influenced by a global economic recession, significant geopolitical events, or a global liquidity crisis affecting both markets simultaneously.

Overall, while changes in the Japanese economy and policies have some impact on the global cryptocurrency market, the direct correlation between the Nikkei index and Bitcoin and major tokens is weak.

3. The Impact of the U.S. Stock Market on the Cryptocurrency Industry

3.1 The Role of U.S. Stocks as a Global Financial Barometer

As the largest and most mature stock market in the world, U.S. stocks can be said to play the role of a "barometer" in the global financial system, and their performance significantly influences the sentiment and decisions of global investors.

Over the past decade, data from the Investment Strategy Group shows that the earnings per share (EPS) growth rate of U.S. stocks has significantly outpaced that of non-U.S. stocks. Since the peak before the 2007 financial crisis, U.S. stock EPS has grown by over 100%, while other regions globally have only seen a 22% increase, with the Eurozone growing by just 4%.

Image Source: Investment Strategy Group

Of course, U.S. stocks will not always outperform other markets, but considering that the dollar may appreciate by 2%, the real returns could be comparable. Moreover, as a safe-haven asset, even amid domestic political tensions and divisions, it may still benefit during heightened geopolitical risks.

In summary, U.S. stocks have unique advantages, such as sustained earnings growth, a leading position in technological innovation, and characteristics of a safe-haven asset, making them a focal point for global investors. When U.S. stocks perform strongly, they often uplift global market sentiment; conversely, declines in U.S. stocks can trigger a chain reaction in global markets.

3.2 The Correlation Between Major Indices (e.g., Dow Jones, Nasdaq, S&P 500) and the Cryptocurrency Market

In recent years, the correlation between major stock indices such as the Dow Jones, Nasdaq, and S&P 500 and the cryptocurrency market has garnered increasing attention, indicating that investors are treating cryptocurrencies, especially Bitcoin, more like traditional stocks.

From the perspective of market reaction, stock indices and cryptocurrencies tend to respond similarly to macroeconomic events and market influencers. For example, significant announcements from the Federal Reserve regarding interest rates can lead to price fluctuations in both stocks and cryptocurrencies. For instance, on May 4, 2022, the Federal Reserve announced an increase in its target federal funds range to 0.75%–1%. On May 5, 2022, Bitcoin fell to around $31,000, while the Nasdaq 100 (NDX) dropped by about 1,400 points, and the S&P 500 (SPX) fell by about 150 points. The price fluctuations in cryptocurrencies are often more pronounced, but the effect is similar.

From a volatility perspective: cryptocurrencies typically exhibit greater volatility than traditional stocks, but their price movements often align with those of major stock indices. This increase in volatility can be attributed to the speculative nature of cryptocurrencies, where investor sentiment may lead to significant price swings based on market conditions and news events.

Investment behavior: As cryptocurrencies gain popularity, many investors are beginning to view them as an alternative asset class. This shift has led to a greater correlation between the performance of cryptocurrencies and stock indices, especially during periods of economic uncertainty or market stress. Investors may shift assets between stocks and cryptocurrencies based on perceived risks and opportunities.

3.3 The Special Relationship Between Tech Stocks and Cryptocurrencies

Tech stocks and cryptocurrencies both represent innovation and growth potential. When investors are attracted to tech companies, it indicates their preference for investment opportunities that can disrupt traditional industries and yield high returns. Similarly, cryptocurrencies are seen as the new frontier in finance and technology, attracting these investors seeking speculative gains. This shared narrative may lead to correlated price movements, especially when technological advancements or regulatory changes impact both sectors.

Moreover, the performance of tech stocks can significantly influence the cryptocurrency market. For example, during strong periods for the tech industry, investor confidence may spill over into cryptocurrencies, driving prices higher. The tech sector has been a major driver of the overall stock market, and its performance can set the tone for broader market trends. As cryptocurrencies are increasingly treated like stocks, especially by institutional investors, their prices may begin to reflect the same market dynamics affecting tech stocks. This includes reactions to economic indicators and the year's biggest narrative—interest rate changes.

Finally, many tech companies are exploring or integrating blockchain technology, which underpins cryptocurrencies. This connection can enhance the appeal of both tech stocks and cryptocurrencies, as advancements in blockchain can lead to new applications and investment opportunities. As tech companies adopt or invest in cryptocurrencies, their stock performance may become increasingly tied to the successful application of digital assets.

4. Investment Strategies and Risk Management

Based on an in-depth analysis of the relationships between the Nikkei index, U.S. stocks, and the cryptocurrency market, it is evident that investors should avoid concentrating all their funds in a single market. Moderate diversification among traditional stocks, cryptocurrencies, and other asset classes can help reduce overall portfolio risk. Investors should not only focus on price trends but also monitor macroeconomic indicators, policy changes, and geopolitical events to comprehensively assess potential risks and opportunities. It is crucial to closely monitor changes in the correlation between major global stock indices and the cryptocurrency market. During periods of increased correlation, caution is warranted to avoid excessive exposure to systemic risks. The investment market is a marathon, not a sprint; in this financial landscape, going far is far more important than running fast.