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

Author: David, Deep Tide TechFlow

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

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

But on the same day, the gold price was $4,323 per ounce, which was only a decrease of $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 fiat currency depreciation, then its performance in the face of risk events should resemble that of gold. 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 lie 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 would 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.”

Actually, the logic is quite simple:

Japan's interest rates have been close to zero or even negative for a long time, making borrowing yen almost cost-free. As a result, hedge funds, asset management institutions, and trading desks around the world have borrowed large amounts of yen, converted it to dollars, and then invested in higher-yielding assets such as U.S. Treasuries, U.S. stocks, and cryptocurrencies.

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

This strategy has existed for decades and is so large that it is difficult to estimate accurately. The conservative estimate is in the hundreds of billions of dollars, and if we include the exposure of derivative products, some analysts believe it could reach trillions.

At the same time, Japan has a special identity:

It is the largest foreign 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 transmit to 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.

Firstly, with the rising cost of borrowing in yen, the arbitrage opportunities are narrowing; what’s more troublesome is that the expectation of interest rate hikes will drive the yen's appreciation, and these institutions initially borrowed in yen to exchange for dollars for investment;

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 timing or variety. Whatever has the best liquidity and is easiest to liquidate 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 one that gets dumped first.

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 corroborated by the data:

The most recent occurrence 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, and BTC fell from $65,000 to $50,000 within the following week, a drop of about 23%. The entire cryptocurrency 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 has experienced a pullback of more than 20%.

The specific starting and ending points of these numbers and their time windows 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.” Even before the decision was announced on the 19th, funds had already started to withdraw in advance.

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

These are probably 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 hasn't 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 a day,” which is true, but it is 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 U.S. SEC approved the spot Bitcoin ETF. This is a milestone that the crypto industry has waited ten years for, allowing trillion-dollar asset management giants like BlackRock and Fidelity to compliantly include BTC in their clients' investment portfolios.

The funds have indeed arrived. But along with it comes an identity shift: the holders of BTC have changed.

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

Currently, the buyers of BTC are retirement funds, hedge funds, and asset allocation models. These institutions also hold US stocks, US bonds, and gold, engaging in “risk budget” management.

When the overall portfolio needs to reduce risk, they will not only sell BTC or only sell stocks, but will reduce their positions proportionally 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, which can essentially be considered uncorrelated.

It is worth noting that this correlation significantly increases during periods of market stress.

In March 2020, the pandemic caused a crash, in 2022 the Federal Reserve aggressively raised interest rates, and concerns about tariffs emerged in early 2025… Each time risk aversion sentiment rises, the correlation between BTC and U.S. stocks becomes tighter.

Institutions do not distinguish between “this is a cryptocurrency asset” or “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 over 60% from 2025 to now, marking the best performance since 1979; BTC has retraced more than 30% from its peak during the same period.

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

This does not mean that there is a problem with the long-term value of BTC, as its five-year compound annual growth rate still far exceeds that of the S&P 500 and Nasdaq.

But at this 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 crucial to grasp why a 25 basis point rate hike by the Bank of Japan can cause BTC to drop several thousand dollars within 48 hours.

It is 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 happens to be the most volatile and easiest to liquidate link in this chain.

What will happen on December 19, ###?

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

The market has already regarded 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?

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

The impact of central bank decisions is never just about the numbers themselves, but rather the signals they send. If the Bank of Japan Governor Kazuo Ueda says at a press conference “we will carefully evaluate based on data in the future” after raising interest rates by 25 basis points, the market would breathe a sigh of relief;

If he says “inflationary pressure continues, 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 2% target. The market is not worried about this rate hike, but rather whether Japan is entering a prolonged tightening cycle.

If the answer is yes, then 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.

First, speculative funds' holdings in the yen have shifted from net short to net long. The severity of the crash in July 2024 was partly due to the market being caught off guard, as a large amount of capital was still shorting the yen at that time. Now the position has reversed, and there is limited room for unexpected appreciation.

Secondly, Japan's government bond yield has risen for more than half a year, increasing from 1.1% at the beginning of the year to nearly 2% now. In a sense, the market has already “raised interest rates on its own,” and the Bank of Japan is merely acknowledging the established fact.

Third, the Federal Reserve has just cut interest rates by 25 basis points, indicating that the global liquidity direction is easing. Japan is tightening in reverse, but if the liquidity of the US dollar is sufficiently ample, it may partially offset the pressure on the yen.

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 interest rate hikes, BTC usually bottoms out within one to two weeks after the decision, and then enters a consolidation or rebound phase. If this pattern holds, late December to early January could be the most volatile window, but it may also be a layout opportunity after being mistakenly sold off.

is accepted and influenced by others.

Putting the previous text together, the logical chain is actually very clear:

Bank of Japan raises interest rates → Yen arbitrage trading positions closed → Global liquidity tightens → Institutions reduce positions based on risk budgets → BTC sold off first as a high Beta asset.

In this chain, BTC has done nothing wrong.

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

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

Before 2024, the price fluctuations of BTC were mainly driven by crypto-native 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 here.

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

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

A single 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 trust that it can provide shelter in chaotic times, then the trend for 2025 is somewhat disappointing. At least at this stage, the market does not price it as a safe-haven asset.

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

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 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 reproduced with the authorization of our partner PANews **, original link | Source: Shenchao TechFlow__)**

_
Disclaimer: This article is only intended to provide market information, and all content and opinions are for reference only and do not constitute investment advice, nor do they represent the views and positions of the blockchain. Investors should make their own decisions and trades, and the author and the blockchain will not bear any responsibility for any direct or indirect losses incurred by investors' trades.
_

Tags: Analyzing cryptocurrency interest rate arbitrage market currency price investment yen Japan Bitcoin market trend