Why does the Japanese Central Bank's rate hike wield the sickle that strikes Bitcoin first?

Author: David, Deep Tide TechFlow

On December 15, Bitcoin dropped from $90,000 to $85,616, a decline of over 5% in a single day.

There were no major crashes or negative events that day, and on-chain data showed no signs of abnormal selling pressure. If you only look at crypto news, it’s hard to find a “plausible” reason.

But on the same day, gold was quoted at $4,323 per ounce, down only $1 from the previous day.

One dropped 5%, the other hardly moved.

If Bitcoin truly is “digital gold,” a tool for hedging inflation and fiat devaluation, its performance in the face of risk events should resemble gold more. But this time, its movement clearly looks more like high Beta tech stocks in the Nasdaq.

What is driving this decline? The answer might be found in Tokyo.

The Butterfly Effect in Tokyo

On December 19, the Bank of Japan will hold a monetary policy meeting. The market expects a 25 basis point rate hike, raising the policy rate from 0.5% to 0.75%.

0.75% sounds modest, but it’s the highest rate in Japan in nearly 30 years. In prediction markets like Polymarket, traders are pricing this rate hike at a 98% probability.

Why would a decision made in Tokyo cause Bitcoin to fall 5% within 48 hours?

It all starts with something called “yen arbitrage trading.”

The logic is simple:

Japan’s interest rates have been near zero or negative for a long time, making borrowing yen almost free. As a result, global hedge funds, asset managers, and trading desks borrow大量 yen, convert it into dollars, and then buy higher-yield assets—U.S. Treasuries, U.S. stocks, or cryptocurrencies.

As long as the returns on these assets exceed the cost of borrowing yen, the interest rate differential becomes profit.

This strategy has existed for decades, with a scale so large it’s hard to quantify precisely. Conservative estimates reach hundreds of billions of dollars, and some analysts believe it could be trillions when including derivatives exposure.

At the same time, Japan has a special status:

It is the largest foreign holder of U.S. Treasuries, holding $1.18 trillion.

This means that changes in Japan’s capital flows can directly impact the world’s most important bond market, which in turn influences the pricing of all risk assets.

Now, when the Bank of Japan decides to hike rates, the underlying logic of this game is shaken.

First, the cost of borrowing yen rises, narrowing the arbitrage window; more troublingly, rate hike expectations will push the yen higher, and these institutions initially borrowed yen to buy dollars for investment.

Now, to repay, they must sell dollar assets and convert back to yen. The stronger the yen, the more assets they need to sell.

This “forced selling” doesn’t pick timing or assets; it sells whatever is most liquid and easiest to liquidate.

Therefore, it’s easy to see that Bitcoin, with 24-hour trading without daily limits and market depth shallower than stocks, is often the first to be hit.

Looking back at the timeline of Japan’s rate hikes over the past few years, this hypothesis is somewhat supported by data:

The most recent was on July 31, 2024. After the BOJ announced a rate hike to 0.25%, the yen appreciated from 160 to below 140 against the dollar. Within a week, BTC dropped from $65,000 to $50,000, a decline of about 23%, evaporating $60 billion in market cap.

According to on-chain analysts, after three previous BOJ rate hikes, BTC experienced declines of over 20%.

While the exact start and end points and time windows vary, the overall direction is consistent:

Every time Japan tightens monetary policy, BTC bears the brunt.

Thus, the author believes that what happened on December 15 is essentially a “front-running” move. Before the December 19 decision, capital was already starting to withdraw.

That day, net outflows from US BTC ETFs reached $357 million, the largest single-day outflow in nearly two weeks; over $600 million of leveraged longs were liquidated within 24 hours.

These are unlikely to be retail panic selling but rather a chain reaction of leveraged position liquidations.

Is Bitcoin still “digital gold”?

The previous explanation covered the mechanics of yen arbitrage trading, but one question remains:

Why is BTC always the first to be hurt and sold?

A common explanation is that BTC has “good liquidity and trades 24/7,” which is true but not enough.

The real reason is that, over the past two years, BTC has been re-priced: it is no longer an independent “alternative asset” outside traditional finance but has been integrated into Wall Street’s risk exposure.

Last January, the US SEC approved a spot Bitcoin ETF. This was a milestone after a decade of anticipation, allowing giants like BlackRock and Fidelity—managing trillions—to legally include BTC in client portfolios.

Funds indeed flowed in. But this also marked a change in identity: the holders of BTC changed.

Previously, BTC was bought by crypto-native players, retail investors, and some aggressive family offices.

Now, it’s institutions like pension funds, hedge funds, and asset allocation models. These entities hold stocks, bonds, and gold as well, managing “risk budgets.”

When the overall portfolio needs to reduce risk, they don’t just sell BTC or stocks but reduce positions proportionally.

Data shows this binding relationship.

In early 2025, the 30-day rolling correlation between BTC and the Nasdaq 100 hit 0.80, the highest since 2022. In contrast, before 2020, this correlation hovered between -0.2 and 0.2, essentially uncorrelated.

More notably, this correlation tends to spike during market stress.

The COVID crash in March 2020, the Fed’s aggressive rate hikes in 2022, and early 2025 tariff worries… each time risk aversion rises, BTC and US stocks become more tightly linked.

Institutions in panic don’t distinguish between “cryptos” and “tech stocks”; they only see one thing: risk exposure.

This raises an awkward question: does the “digital gold” narrative still hold?

If we look at the longer term, gold has gained over 60% since 2025, its best year since 1979; meanwhile, BTC has retraced over 30% from its high.

Both are touted as assets to hedge inflation and fight fiat devaluation, yet in the same macro environment, they have moved in completely opposite directions.

This isn’t to say BTC’s long-term value is flawed; its five-year CAGR still far exceeds the S&P 500 and Nasdaq.

But at this stage, its short-term pricing logic has changed: it’s a high-volatility, high Beta risk asset, not a safe haven.

Understanding this helps explain why a 25 basis point rate hike by the Bank of Japan can cause BTC to fall thousands of dollars within 48 hours.

It’s not because Japanese investors are selling BTC, but because, during global liquidity tightening, institutions reduce all risk exposures following the same logic, and BTC is the most volatile and easiest to liquidate on that chain.

What will happen on December 19?

When writing this article, there are two days left before the BOJ meeting.

The market has already priced in the rate hike as a given. The 10-year Japanese government bond yield has risen to 1.95%, the highest in 18 years. In other words, the bond market has already discounted the tightening expectations.

If the rate hike is fully expected, will there still be shocks on December 19?

Historical experience suggests yes, but the intensity depends on the wording.

The impact of a central bank decision is never just the number itself but the signals it sends. Even with a 25 basis point hike, if BOJ Governor Ueda says “future assessments will be data-dependent,” the market will breathe a sigh of relief;

If he says “inflation pressures persist, further tightening cannot be ruled out,” it could trigger another wave of selling.

Japan’s inflation rate is around 3%, above the BOJ’s 2% target. The market worries not about this hike but whether Japan is entering a sustained tightening cycle.

If the answer is yes, the unraveling of yen arbitrage trading won’t be a one-time event but a process that could last several months.

However, some analysts believe this time might be different.

First, speculative positions on the yen have shifted from net short to net long. The sharp decline in July 2024 was partly due to the market being caught off guard, with large short positions still in place at the time. Now, the position has reversed, and the upside potential is limited.

Second, Japanese government bond yields have been rising for over half a year, from around 1.1% at the start of the year to nearly 2% now. In a sense, the market has “already priced in” the rate hikes; the BOJ is just acknowledging the reality.

Third, the Fed has just cut rates by 25 basis points, and the overall global liquidity trend remains accommodative. Japan is tightening in the opposite direction, but if dollar liquidity remains ample, it could partially offset yen-related pressures.

These factors don’t guarantee BTC won’t fall, but they suggest the declines might not be as severe as previous episodes.

Looking at past BOJ rate hikes, BTC usually bottoms within one to two weeks after the decision, then consolidates or rebounds. If this pattern holds, late December to early January could be the most volatile window, but also a potential opportunity for a “wrongly punished” position.

Acceptance and Influence

Connecting the dots, the logical chain is quite clear:

Bank of Japan rate hike → Yen arbitrage unwinding → Global liquidity tightening → Institutions reducing risk exposure → BTC, as a high Beta asset, being sold first.

In this chain, BTC hasn’t done anything wrong.

It’s simply placed at a point beyond its control, at the end of the global macro liquidity transmission chain.

You may find it hard to accept, but this is the new normal in the ETF era.

Before 2024, BTC’s price movements were mainly driven by crypto-native factors: halving cycles, on-chain data, exchange dynamics, regulatory news. During that time, its correlation with stocks and bonds was low, and it functioned to some extent as an “independent asset class.”

After 2024, Wall Street arrived.

BTC has been integrated into the same risk management framework as stocks and bonds. Its holder base has changed, and so has its pricing logic.

BTC’s market cap surged from a few hundred billion to $1.7 trillion. But this also brought a side effect: its immunity to macro events has disappeared.

A single statement from the Fed or a decision by the BOJ can cause it to fluctuate over 5% within hours.

If you believe in the “digital gold” narrative—that it can provide shelter in turbulent times—2025’s performance might be disappointing. At least for now, the market isn’t pricing it as a safe haven.

Maybe this is just a temporary misalignment. Maybe institutionalization is still in its early stages, and once allocation proportions stabilize, BTC will find its rhythm again. Maybe the next halving cycle will reaffirm the dominance of crypto-native factors…

But before that, if you hold BTC, you need to accept a reality:

You are also exposed to global liquidity risks. What happens in a conference room in Tokyo might be more decisive for your account balance next week than any on-chain indicator.

This is the cost of institutionalization. Whether it’s worth it depends on each individual’s perspective.