Crypto crash: why are Bitcoin Cash, LUNC, Pi Network, WLFI going down?

The cryptocurrency market recently witnessed a notable downturn, with Bitcoin experiencing its lowest price point in three weeks. This movement, occurring on May 18, saw Bitcoin's value dip significantly, setting a bearish tone for the wider market. Following Bitcoin's lead, many altcoins also recorded substantial losses. Bitcoin Cash (BCH) dropped by 7.30%, while Terra Luna Classic (LUNC), Pi Network (PI), and World Liberty Finance (WLFI) each plunged over 5%.

This broad market correction led to a 1.36% reduction in the total cryptocurrency market capitalisation, which settled at $2.56 trillion. A significant contributor to these price drops was a surge in liquidations across various exchanges. Liquidations, which occur when highly leveraged trading positions are forcibly closed due to insufficient margin, saw a 42% increase in a single day, totalling $661 million.

Ethereum positions accounted for over $257 million of these liquidations, with Bitcoin liquidations wiping out more than $182 million. Other cryptocurrencies like Solana (SOL), Ripple (XRP), and Bitcoin Cash were also heavily impacted. Such widespread liquidations often create a downward spiral, as forced selling adds further pressure to already declining prices, amplifying market volatility.

Further compounding the market's woes were substantial outflows from spot Bitcoin and Ethereum Exchange Traded Funds (ETFs). Data showed spot Bitcoin ETFs shedding over $1 billion in the preceding week, indicating a decrease in investor demand. Similarly, Ethereum funds experienced six consecutive days of outflows, losing over $255 million in the week, bringing monthly outflows to over $83 million. These outflows suggest that some investors are booking profits following recent gains, or perhaps reducing their exposure to the asset class amid market uncertainty.

Another critical factor influencing the crypto market's performance proved to be the upward trend in global bond yields. Both Japanese and United States bond yields reached multi-year highs, driven in part by escalating crude oil prices. Brent crude and West Texas Intermediate (WTI) rose significantly, fueling concerns about inflationary pressures. In response, there are growing expectations that central banks, particularly the US Federal Reserve, might consider raising interest rates. Historically, periods of rising interest rates tend to see risk assets like cryptocurrencies and tech stocks underperform, as investors shift towards less volatile, yield-bearing investments.

Why it matters for Australian investors

The global movements in bond yields and central bank policies have tangible implications for Australian investors, even though the Reserve Bank of Australia (RBA) operates independently. Rising global bond yields can influence local financial markets by making traditional assets, such as government bonds, more attractive relative to riskier investments like cryptocurrencies. This shift can lead to capital outflow from the Australian crypto market or dampen new investment.

For Australian investors holding cryptocurrencies, the recent market downturn highlights the importance of understanding capital gains tax (CGT) implications as regulated by the Australian Taxation Office (ATO). Should an investor sell crypto assets at a loss, this can be used to offset capital gains from other investments. Conversely, significant profits would attract CGT, subject to the individual's income tax rate and holding period. Fluctuations as seen recently underscore the need for meticulous record-keeping for ATO compliance.

Local Australian crypto exchanges like CoinSpot, Independent Reserve, Swyftx, and BTC Markets are the primary gateways for Australian investors into the digital asset space. While these platforms facilitate trading, they are also impacted by broader market sentiment and price movements. A global crypto downturn can lead to reduced trading volumes and increased volatility on these local exchanges. Investors using these platforms should be aware of potential liquidity changes and the operational stability of their chosen platform.

Moreover, the regulatory landscape in Australia, overseen by bodies like AUSTRAC for anti-money laundering (AML) and counter-terrorism financing (CTF) and ASIC for consumer protection in some crypto-related services, continuously evolves. While not directly causing price drops, a volatile market can intensify calls for stricter regulations, potentially altering how Australian investors access and trade crypto assets in the future. Remaining informed about regulatory developments is crucial for local participants.

Impact on the AUD market

The Australian dollar (AUD) exchange rate can be indirectly influenced by global economic shifts that impact the crypto market. When global investors become risk-averse due to factors like rising bond yields, they often move capital out of riskier assets and into safer havens, or even into currencies perceived as more stable. This 'flight to safety' can create downward pressure on currencies like the AUD if global sentiment deteriorates, as Australia is often considered a commodity-linked currency and thus more susceptible to global economic health.

For Australian investors, the AUD-to-crypto exchange rate is a direct determinant of their local currency returns. A depreciating AUD against the USD can effectively increase the cost of acquiring US dollar-denominated crypto assets, or conversely, potentially amplify AUD-denominated gains if the crypto asset holds or increases its USD value while the AUD weakens. This dynamic adds another layer of complexity for Australian investors to consider when evaluating their crypto portfolios.

While the crypto market is still largely denominated in USD on an international scale, local Australian exchanges price assets in AUD. For example, a Bitcoin price drop to US$76,500 means a corresponding, though perhaps not identical, drop in its AUD value on platforms like CoinSpot or Swyftx, factoring in the prevailing AUD/USD exchange rate. Investors withdrawing profits, or even just holding stablecoins, need to consider their exposure to AUD fluctuations relative to their crypto holdings.

What to watch next

Looking ahead, several key global economic indicators and geopolitical events could profoundly influence the crypto market and, by extension, Australian investors. The upcoming Federal Open Market Committee (FOMC) minutes from the US Federal Reserve will be critical. These minutes provide deeper insights into the Fed's monetary policy stance, including any signals regarding future interest rate adjustments. Hawkish sentiments could further dampen crypto investor enthusiasm, while dovish signals might offer some relief.

Geopolitical developments also warrant close attention. Unforeseen global conflicts or political instability can trigger significant risk-off sentiment in financial markets, leading investors to divest from volatile assets like cryptocurrencies. Australian investors should monitor major international news for any developments that could create such market shocks. Volatility stemming from these events often translates directly to the AUD-denominated value of crypto holdings.

The performance of traditional financial markets will also be a bellwether for crypto. Continued weakness in global stock markets, particularly in tech-heavy indices, could reinforce the selling pressure on cryptocurrencies, which are often correlated with risk assets. Conversely, a rebound in equities could signal a broader return to risk appetite, potentially benefiting the crypto sector. Understanding these interdependencies is key for navigating the evolving market landscape from an Australian perspective. Continued monitoring of commodity prices, particularly crude oil, will also be important, as they influence inflation expectations and central bank policy.

Finally, outflows from Bitcoin and Ethereum ETFs remain a critical metric. Sustained outflows would continue to indicate waning institutional or large-scale investor interest, potentially prolonging market weakness. Conversely, a reversal in this trend, with renewed inflows, could signal a turning point and renewed confidence in these major cryptocurrencies. For Australian investors, observing these global fund flows can offer insights into overall market health and investor sentiment around flagship crypto assets.