Photo Credit: Karolina Kaboompics 

As the crypto market slowly recovers from its weekend downfall, crypto analytics platform BIoFin Academy reported that the impact of the carry trade unwinds on the United States financial cycle is low and may still affect investor sentiment.

In an Aug. 6 X post, BIoFin reported that bearish expectations in the short term and medium term are spreading across multiple markets, including the crypto market. One of the factors that put pressure on the assets, including cryptocurrencies, was the rapidly narrow interest rate of the Federal Reserve and the Bank of Japan.  

Carry trades refer to a trading strategy where the investors borrow money in a currency with a low interest rate to invest in high-yielding currency or assets.

On July 31, multiple mainstream media, including Reuters, reported that the Bank of Japan (BOJ) had increased its short-term policy rate to 0.25% from 0-0.1%.   

Many analysts have noticed that the rise of interest rates caused multiple markets to witness a bearish performance. Highlighting the event of BOJ increasing its interest rates, Colin Wu, a crypto journalist, said: 

“Consequently, the yen carry trade officially ended, and many traders began unwinding their positions, leading to a massive sell-off of dollar-denominated risk assets, converting them back to yen to repay debts.”

Wu further pointed out that the unwinding of positions was one of the factors that led to the crypto market crash on Aug. 5. “One piece of evidence supporting this is that the decline in income-producing assets far exceeded that of zero-interest assets like [Bitcoin], particularly [Ether], which are core targets for interest rate arbitrage,” he wrote.

Despite the sudden crypto market crash on Aug. 5, BTC and ETH have gradually recovered from their recent slump, surging 8.52% and 11.87% over the 24 hours, respectively, per CoinMarketCap data.

BIoFin mentioned that the medium to long-term butterfly index has returned to average levels. However, the analytics platform also warned that the price fluctuation is not over yet.

Read more: Bitcoin falls to $50K, buy the dip sentiment subdued — Santiment