Why did the Bank of Japan's interest rate hike strike Bitcoin first?

Author: David, Deep Tide TechFlow

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

There were no major blowups or negative events on this day, and on-chain data does not show any unusual selling pressure. If you only look at news from the crypto world, it is hard to find a “reasonable” explanation.

But on the same day, the gold price was $4,323/ounce, a decrease of only $1 compared to the previous day.

One dropped by 5%, while the other hardly moved.

If Bitcoin is truly “digital gold,” a tool for hedging against inflation and the devaluation of fiat currencies, then its performance in the face of risk events should resemble that of gold more closely. However, this time its trend clearly resembles that of high Beta tech stocks on the Nasdaq.

What is driving this round of decline? The answer may be found in Tokyo.

The Butterfly Effect of Tokyo

On December 19, the Bank of Japan will hold a monetary policy meeting. The market expects it to raise interest rates by 25 basis points, increasing the policy rate from 0.5% to 0.75%.

0.75% may not sound high, but it is the highest interest rate in Japan in nearly 30 years. In prediction markets like Polymarket, traders are pricing the probability of this rate hike at 98%.

Why does a decision made by a central bank far away in Tokyo cause Bitcoin to drop by 5% within 48 hours?

This has to start with something called “Yen Arbitrage Trading.”

The logic is actually very simple:

Japan's interest rates have long been close to zero or even negative, making borrowing in yen almost free. As a result, global hedge funds, asset management institutions, and trading desks have borrowed large amounts of yen, exchanged it for dollars, and then purchased higher-yielding assets, including U.S. Treasuries, U.S. stocks, and cryptocurrencies.

As long as the return on these assets is higher than the borrowing cost of the yen, the spread in between is the profit.

This strategy has existed for decades, with a scale so large that it is difficult to quantify accurately. A conservative estimate puts it at hundreds of billions of dollars, and if derivative exposures are included, some analysts believe it could reach trillions.

At the same time, Japan has a special identity:

It is the largest overseas holder of U.S. Treasury bonds, holding 1.18 trillion dollars in U.S. debt.

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

Now, when the Bank of Japan decides to raise interest rates, the underlying logic of this game has been shaken.

First, with the rising cost of borrowing yen, the arbitrage opportunities are narrowing; more troublesome is the expectation of interest rate hikes which will drive the yen's appreciation, while these institutions initially borrowed in yen and exchanged for dollars to invest;

To repay now, they have to sell their dollar assets and exchange them for yen. The higher the yen rises, the more assets they need to sell.

This kind of “forced selling” does not choose the timing or the variety. Whatever has the best liquidity and is easiest to cash out will be sold first.

Therefore, it is easy to think that Bitcoin trading 24 hours a day has no price limits, and the market depth is relatively shallower than stocks, making it more likely to be the first one to be crashed.

Looking back at the timeline of the Bank of Japan's interest rate hikes over the past few years, this speculation has also been somewhat confirmed by the data:

The most recent event was on July 31, 2024. After the BOJ announced an interest rate hike to 0.25%, the Japanese yen appreciated from 160 to below 140 against the US dollar, while BTC fell from $65,000 to $50,000 in the following week, a decline of about 23%, and the entire crypto market evaporated $60 billion in market value.

According to statistics from multiple on-chain analysts, after the last three interest rate hikes by the Bank of Japan, BTC experienced a pullback of over 20%.

The specific starting and ending points and time windows of these numbers vary, but the direction is highly consistent:

Every time Japan tightens its monetary policy, BTC becomes a disaster area.

Therefore, the author believes that what happened on December 15 was essentially the market “rushing ahead.” Without waiting for the resolution on the 19th to be announced, funds have already begun to withdraw in advance.

On that day, the net outflow of the US BTC ETF was 357 million dollars, the largest single-day outflow in the past two weeks; over 600 million dollars in leveraged long positions were liquidated in the crypto market within 24 hours.

These are likely not retail investors panicking, but rather a chain reaction of arbitrage trading liquidations.

Is Bitcoin still not digital gold?

The above explains the mechanism of yen arbitrage trading, but there is still one question that has not been answered:

Why is BTC always the first one to get sold off?

A common saying is that BTC “has good liquidity and trades 24 hours,” which is true, but it's not enough.

The real reason is that BTC has been repriced over the past two years: it is no longer an “alternative asset” independent of traditional finance, but has been welded into Wall Street's risk exposure.

In January last year, the US SEC approved a spot Bitcoin ETF. This is a milestone that the crypto industry has been waiting for for ten years, and trillion-dollar asset management giants like BlackRock and Fidelity can finally compliantly include BTC in their clients' investment portfolios.

The funds have indeed arrived. But with it comes a change of identity: the holders of BTC have changed.

In the past, those who bought BTC were native crypto players, retail investors, and some aggressive family offices.

Now, those buying BTC are retirement funds, hedge funds, and asset allocation models. These institutions also hold U.S. stocks, U.S. bonds, and gold, managing what is called “risk budgeting.”

When the overall portfolio needs to reduce risk, they won't just sell BTC or only sell stocks, but will proportionally reduce their positions together.

The data can show this binding relationship.

In early 2025, the 30-day rolling correlation between BTC and the Nasdaq 100 index reached 0.80, the highest level since 2022. In contrast, before 2020, this correlation fluctuated between -0.2 and 0.2 for years, essentially considered unrelated.

It is worth noting that this correlation tends to increase significantly during periods of market stress.

In March 2020, the pandemic caused a sharp decline, in 2022 the Federal Reserve raised interest rates aggressively, and concerns about tariffs at the beginning of 2025… Every time risk aversion rises, the correlation between BTC and U.S. stocks becomes tighter.

Institutions do not differentiate between “this is a cryptocurrency asset” and “this is a tech stock” during panic; they only look at one label: risk exposure.

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

If we extend the time frame, gold has risen more than 60% from 2025 to now, making it the best performing year since 1979; BTC has retraced over 30% from its peak during the same period.

Both are referred to as assets that hedge against inflation and counteract the depreciation of fiat currency, but they have shown completely opposite curves in the same macro environment.

This does not mean that there are issues with the long-term value of BTC; its five-year compound annual growth rate still far exceeds that of the S&P 500 and Nasdaq.

But at this current stage, its short-term pricing logic has changed: it is a high volatility, high Beta risk asset, rather than a hedging tool.

Understanding this point is essential to comprehend why a 25 basis point rate hike by the Bank of Japan can lead to a drop of several thousand dollars in BTC within 48 hours.

It's not because Japanese investors are selling BTC, but because when global liquidity tightens, institutions will reduce all risk exposures using the same logic, and BTC just happens to be the most volatile and easily liquidated link in this chain.

What will happen on December 19, ###?

When writing this article, there are still two days until the Bank of Japan's monetary policy meeting.

The market has already taken interest rate hikes as a given. The yield on Japan's 10-year government bonds has risen to 1.95%, the highest in 18 years. In other words, the bond market has already priced in the tightening expectations.

If the interest rate hike has already been fully anticipated, will there still be an impact on the 19th?

Historical experience is: yes, but the intensity depends on the wording.

The impact of central bank resolutions is never just about the numbers themselves, but rather the signals they release. Even if interest rates are raised by 25 basis points, if the Governor of the Bank of Japan, Kazuo Ueda, says at a press conference, “We will assess cautiously based on data in the future,” the market will breathe a sigh of relief;

If he says “inflationary pressures persist and further tightening cannot be ruled out,” that could be the starting point for another wave of selling.

Currently, Japan's inflation rate is around 3%, higher than the BOJ's target of 2%. The concern in the market is not about this rate hike, but whether Japan is entering a sustained tightening cycle.

If the answer is affirmative, the disintegration of the yen arbitrage trade is not a one-time event, but a process that lasts for several months.

However, some analysts believe this time might be different.

Firstly, speculative funds have changed their position on the Japanese yen from net short to net long. The severity of the crash in July 2024 was partly because the market was caught off guard, as a large amount of capital was still shorting the yen at that time. Now that the position has reversed, there is limited room for unexpected appreciation.

Secondly, Japanese government bond yields have risen for more than half a year, climbing from 1.1% at the beginning of the year to nearly 2% now. In a sense, the market has already “raised interest rates by itself,” and the Bank of Japan is merely acknowledging the established facts.

Third, the Federal Reserve just cut interest rates by 25 basis points, and the overall direction of global liquidity is loose. Japan is tightening in reverse, but if the dollar liquidity is sufficiently ample, it may partially offset the pressure on the yen side.

These factors cannot guarantee that BTC will not drop, but they may mean that this decline will not be as extreme as in previous instances.

Based on the trends observed after previous BOJ rate hikes, BTC usually bottoms out within one to two weeks after the decision, then enters consolidation or rebounds. If this pattern holds, late December to early January could be the most volatile window, but it may also present an opportunity for positioning after a potential mispricing.

is accepted and influenced by others.

The logic chain is actually very clear when you string the previous text together:

Bank of Japan raises interest rates → Yen arbitrage trades are closed → Global liquidity tightens → Institutions reduce positions based on risk budgets → BTC is prioritized for sale as a high Beta asset.

In this chain, BTC did nothing wrong.

It is simply placed at a position it cannot control, at the end of the global macro liquidity transmission chain.

You may not accept it, but this is the new normal of the ETF era.

Before 2024, the price fluctuations of BTC were mainly driven by native crypto factors: halving cycles, on-chain data, exchange dynamics, and regulatory news. At that time, its correlation with US stocks and bonds was very low, and to some extent, it indeed resembled an “independent asset class.”

After 2024, Wall Street is coming.

BTC has been incorporated into the same risk management framework as stocks and bonds. Its holder structure has changed, and the pricing logic has also changed.

BTC's market value has surged from hundreds of billions of dollars to 1.7 trillion dollars. However, it has also brought a side effect: BTC's immunity to macro events has disappeared.

A statement from the Federal Reserve or a decision from the Bank of Japan can cause it to fluctuate by more than 5% within a few hours.

If you believe in the narrative of “digital gold” and its ability to provide shelter in chaotic times, then the trend for 2025 is somewhat disappointing. At least at this current stage, the market does not price it as a safe-haven asset.

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

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

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

This is the cost of institutionalization. As for whether it is worth it, everyone has their own answer.

(The above content is excerpted and reprinted with the authorization of our partner PANews **, original link | Source: Shenchao TechFlow__)**

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Disclaimer: This article is intended to provide market information. All content and opinions are for reference only and do not constitute investment advice, nor do they represent the views and positions of Blockchain. Investors should make their own decisions and trades, and the author and Blockchain will not bear any responsibility for any direct or indirect losses incurred by investors' trades.
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Tags: Analyzing Cryptocurrency Interest Rate Arbitrage Market, Coin Price, Investment, Japanese Yen, Bitcoin Market Trend