Key takeaways:
Leverage surges in the crypto market, with $527M in liquidations in 24 hours, signaling growing caution among traders.
Tighter liquidity and rising AI debt risks push traders to exit riskier assets, contributing to a market correction.
The cryptocurrency market saw a correction on Monday, with Bitcoin (BTC) retesting the $85,000 level and Ether (ETH) dropping to $2,900. Traders became more risk-averse after a survey showed worsening economic conditions in the United States and changes in investor expectations regarding the proposed options for the next US Federal Reserve Chair.
The resilience of the US 5-year Treasury after hitting a low of 98.64 on Wednesday strongly suggests that traders were seeking protection from inflation, especially as the Fed cut interest rates. The “One Big Beautiful Bill Act” extended tax credits and raised the US debt ceiling by $5 trillion, a situation made more challenging by the Fed’s recent decision to expand its balance sheet by $40 billion per month.
The consumer sector remains a concern, as a CNBC survey revealed that 41% of Americans plan to spend less during the holidays this year, up from 35% in 2024. Additionally, 61% of respondents cited affordability problems due to stagnant wages amid rising prices. US October retail sales data will be released on Tuesday, along with November nonfarm payrolls figures.
Excessive leverage in the cryptocurrency market continues to be a major issue, with futures open interest standing at $135 billion. Over $527 million worth of bullish leveraged positions have been liquidated in the past 24 hours, causing traders to worry about further downside. Weakness in the artificial intelligence sector has also driven traders to increase cash positions, exiting riskier asset classes like cryptocurrencies.
Hedge fund giant Bridgewater Associates reportedly stated that tech firms’ heavy reliance on debt markets to fund AI investments has reached a dangerous phase, according to Reuters. "Going forward, there is a reasonable probability that we will soon find ourselves in a bubble," Bridgewater's Co-Chief Investment Officer Greg Jensen wrote in a note.
Demand for leverage on short (sellers) positions surged on Bybit, pushing the annualized funding rate below zero. This unusual situation, where longs (buyers) are paid to keep their leveraged positions open, rarely lasts long as arbitrage opportunities emerge. However, since the Oct. 10 crash, liquidity has become much tighter, with some market makers likely facing sizable losses.
Part of Monday’s decline in the US stock market can be attributed to a decrease in Kevin Hassett’s odds of replacing Jerome Powell as the next Fed Chair. CNBC reported that President Donald Trump’s inner circle pushed for someone perceived as more independent. Trump said on Friday that Kevin Warsh would also be a great fit, which eased concerns about the fragility of the US dollar.
The US Dollar Index (DXY) found support at the 98 level after four consecutive weeks of decline. This stability suggests higher confidence in the US government’s ability to avoid a recession, which is somewhat supportive for the stock market but less so for cryptocurrencies.
Related: Bitcoin to $40K? Macro analyst Luke Gromen turns bearish on Bitcoin
Bitcoin and Ether are generally seen as part of an independent financial system, so the relative strength of the US dollar reduces the demand for alternative hedges. The excessive leverage in the cryptocurrency market, combined with broader macroeconomic uncertainty, is likely to continue weighing on prices.
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