TradFi vs Crypto: Analyzing Recovery Times After Major Crashes

TL;DR

• "Black Monday 2024" on August 5 caused a market crash, affecting both TradFi and cryptocurrency markets.
• The crash was triggered by an unexpected interest rate hike from the Bank of Japan and weak U.S. economic data.
• S&P 500 and Nasdaq experienced significant drops, with crypto markets following suit.
• Bitcoin fell below $50,000 but rebounded quickly
• Historically, 5 major market events (2020-2023) that impacted crypto:
• COVID-19 Crash (2020): Bitcoin experienced a 50% drop, recovered in 9 months
• US Stock Decline (2021): 17% drop, quick recovery
• China's Crypto Ban (2021): 9% drop, rebounded until Fed rate hike
• US Debt Ceiling Crisis (2023): 17% drop, fast rebound post-resolution
• Banking Sector Turmoil (2023): 29% drop, recovery by October 2023
• Key insights:
• Growing correlation between TradFi and crypto
• Crypto shows higher volatility but often faster recovery
• Sensitive to regulations and global economic events
• Maturing relationship with traditional finance

Let’s take a look at last week’s Black Monday meltdown and analyze five major TradFi market events between 2020 and 2023 that had substantial impacts on the crypto market, revealing the increasing interconnectedness of these financial ecosystems.

“Black Monday 2024” Sparks Recession Fears

What Caused The Market Crash

Performance of S&P and Nasdaq

Prior to the crash, both the S&P 500 and Nasdaq 100 were experiencing volatility, with the Nasdaq hitting record highs in July.

On August 5, the S&P 500 fell 3%, its worst performance since 2022, and the Nasdaq plummeted over 6% in early trading before closing down around 3%.

Following the crash, both indices began a gradual recovery. Investor sentiment improved as economic fears abated slightly and confidence in major tech stocks was restored, although volatility remained high.

Impact on Crypto

After feeling the jitters over the weekend, the crypto market experienced a severe decline on August 5, with total market capitalization dropping by $314 billion.

Analyzing Recent TradFi Crashes and Their Impact on Crypto Markets

1. COVID-19 Market Crash (March 2020)

This event had an even more profound effect on crypto that forever changed its future.

Crypto Market Impact

The Down

Bitcoin's price dropped from around $9,100 to about $4,800 in mid-March, a decline of nearly 50%. On 12 March 2020, it went as low as $3,870!

The crash demonstrated a huge correlation between crypto and TradFi markets, as Bitcoin's movements mirrored traditional assets when the going got really tough. Bitcoin failed its biggest test as a supposed safe haven asset at the time.

The Up

However, the crypto market's recovery was remarkably swift, boosted by a buoyant Bitcoin, as the US government and other nations quickly announced measures to stimulate their economies and keep them artificially afloat while their populations were kept indoors.

This influx of free or low interest-bearing capital resulted in both the stock markets and Bitcoin reaching new all-time highs by the end of 2020.

It’s safe to say that the recovery from the Covid crash marked a turning point in how cryptocurrencies were perceived during times of global economic uncertainty.

2. U.S. Stock Market Decline (Sept 2021)

Inflationary fears and potential interest rate hikes led to a significant downturn in the stock market in September 2021, with the S&P 500 dropping about 5%.

Crypto Market Impact

• Bitcoin's price fell from approximately $52,000 to around $43,000, a decline of about 17%.
• This event highlighted the growing correlation between Bitcoin and traditional equities.
• It demonstrated that crypto markets were becoming increasingly sensitive to macroeconomic factors affecting TradFi markets.

3. China's Cryptocurrency Ban (Sept 2021)

China's intensified crackdown on crypto trading and mining in Sept 2021 coincided with broader declines in global markets.

How It Impacted Crypto Markets

• Bitcoin dropped from around $44,000 to about $40,000 within days, a 9% decrease. By October, markets began to recover sharply, pumping until the Fed’s November decision to hike interest rates spelled the end of the bull market.
• The event showcased how regulatory actions in major economies could simultaneously affect both TradFi and crypto markets and demonstrated the ongoing regulatory risks faced by the crypto industry and their potential to cause market volatility.

4. U.S. Debt Ceiling Crisis (May 2023)

The U.S. debt ceiling crisis in May 2023 raised concerns about potential government defaults, leading to volatility in both stock and crypto markets. As soon as the issue was resolved, markets rebounded quickly, Bitcoin significantly more.

How It Impacted Crypto Markets

• Bitcoin's price dropped $30,000 to approximately $25,000, a 17% decline.
• The “debt ceiling crisis” illustrated how macroeconomic issues and political uncertainties in TradFi could spill over into crypto markets.
• It demonstrated that Bitcoin, despite often being touted as a hedge against traditional financial system risks, was not immune to such concerns.

5. Banking Sector Turmoil (March 2023)

The year 2022 could be considered an annus horribilis for crypto, as some of its biggest pillars collapsed in spectacular fashion, most notably Luna Terra, FTX, 3 Arrows Capital, Celsius, and Voyager.

However, the first quarter of 2023 offered no respite. As the US continued to raise interest rates on a near-monthly basis in order to halt rampant inflation (and destroy some of that stimmy money it handed out in 2020), smaller banks began to feel the heat and many folded.

How It Impacted Crypto Markets

Bitcoin's price dropped from around $28,000 to about $20,000, a whopping 29% decrease.

The incident underlined that both TradFi and crypto markets were wobbly in the face of systemic risks.

Interestingly, some viewed this event as well as the SEC and DoJ’s scorched earth attack against the industry as potentially positive for crypto in the long term.

What Crypto Lessons Have We Learned From TradFi Crashes?

1. We’re Getting Increasingly Correlated

The data shows a growing correlation between TradFi and crypto markets, particularly during times of economic stress or uncertainty.

The perception of cryptocurrencies, especially Bitcoin, has evolved from a fringe, unproven asset to a more mainstream financial instrument, thanks to the endorsement of mainstream business giants like Larry Fink, Michael Saylor, and most recently Donald Trump. This means that it will increasingly be affected by global economic events. We’re all in the same boat now.

2. We’re Still Sensitive to Regulatory Uncertainty

Crypto markets have shown high sensitivity to regulatory actions and macroeconomic policies, as evidenced by the reactions to China's ban and the U.S. debt ceiling crisis.

3. Expect More Volatility

Crypto can also be traded 24/7, whereas stock markets are only open on weekdays. This makes it easier for digital assets to crash.

4. Recovery Patterns

While they might suffer the most when traditional markets wick down, all that volatility works both ways, and we can see that crypto markets often showed faster recovery times than traditional markets, particularly evident in the post-COVID-19 crash recovery.

Conclusion

The events between 2020 and 2023 reveal a maturing relationship between TradFi and crypto markets. As cryptocurrencies have gained mainstream attention and adoption, their price movements have become more closely tied to traditional financial markets and global economic conditions.

This increased correlation suggests that crypto assets are increasingly viewed as part of the broader financial ecosystem rather than as entirely separate entities.

However, the crypto market's higher volatility and sensitivity to regulatory changes continue to set it apart from traditional assets.

For investors and traders, it’s important to understand that we are the newest arrivals to the global financial system, and with so little proven use case at this early stage, markets will move where they can get the most favorable safety in times of crisis.

Take a leaf from TradFi’s investor book and really do your due diligence on what you’re investing in. As history has shown, during these flush-out events, the projects with real substance will survive, and then thrive.