The world's largest arbitrage business is collapsing, and this is the truth behind the market crash?

Today, BTC once touched $85,600, with 200,000 people liquidated across the network.

Everyone is asking: Why is it again the yen interest rate hike?

The answer lies in a global arbitrage deal worth up to $20 trillion.

01 | What happened in the market on December 1?

Today in the Asian early session, the crypto market faced a severe setback.

Bitcoin plunged from $95,000 to $85,600, a drop of over 5%.

Ethereum, SOL, and other mainstream coins fell sharply in sync.

The total liquidation amount across the network surged, with over 200,000 investors exiting in this massacre.

At the same time, traditional markets have also not been spared:

The Nikkei 225 index briefly fell below 50,000 points during trading, down 1.5%

The yen rose 0.4% against the dollar, reaching 155.49

Japan's 2-year government bond yield surpassed 1%, the highest level since 2008

The trigger for all of this came from one person's speech.

Bank of Japan Governor Kazuo Ueda stated in a speech to business leaders:

"The central bank will assess the pros and cons of adjusting policy rates and will make decisions in a timely manner based on the economy, inflation, and financial market conditions."

These remarks were viewed by the market as the clearest hint of an interest rate hike so far.

Traders' expectations for the Bank of Japan to announce an interest rate hike at the meeting on December 19 surged to 76%.

Arthur Hayes subsequently tweeted to clarify:

"Today's Bitcoin plunge is because the Bank of Japan may raise interest rates."

But the question arises—how can Japan's interest rate policy shake the global market?

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02 | What is yen carry trade? The world's largest arbitrage business

To understand today's crash, one must first understand this ongoing 30-year global arbitrage trade worth up to $20 trillion.

Its name is: yen carry trade.

The arbitrage logic is simple:
- Borrow yen in Japan at nearly 0% interest
- Exchange yen for dollars
- Invest in high-yield assets like U.S. stocks, U.S. bonds, cryptocurrencies, etc.
- The interest differential is profit

Japan has maintained near 0% or negative interest rates for a long time, making the yen the cheapest financing currency globally.

Global hedge funds, investment banks, pension funds, and even retail investors are frantically borrowing yen and investing overseas.

How exaggerated is the scale?

The global liquidity related to yen financing: $20 trillion.

This figure means:

- Equivalent to 5 times Japan's GDP
- Equivalent to 18% of global GDP
- Equivalent to one-third of the U.S. stock market's market value

In my view, this is more like an invisible lever in the global financial system.

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03 | Why would a yen interest rate hike trigger a global crash?

Because a yen interest rate hike triggers a triple kill.

First kill: borrowing costs rise

The cost of borrowing yen was 0%, but after the rate hike, it could rise to 0.5% or even higher. The interest differential is compressed, and the attractiveness of arbitrage declines.

Second kill: yen appreciation (deadly blow)

Assuming you borrowed 100 million yen (about $667,000) at an exchange rate of 150 to invest in BTC.
Now with the yen appreciating to 145, you would need to spend $689,000 to repay 100 million yen.
Because of the exchange rate change, you would pay an additional $22,000.

If it rises to 140, 135, 130... losses will multiply.

Third kill: forced liquidation

Rising borrowing costs + yen appreciation will force arbitrage traders to sell risk assets to repay loans in yen.

With $20 trillion in arbitrage, a mere 10% liquidation means $2 trillion in selling.

Where does the selling come from?
- U.S. stocks
- U.S. bonds
- Emerging markets
- Cryptocurrencies

So BTC and ETH will be indiscriminately sold off.

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04 | History doesn't repeat itself, but it often rhymes: The bloody warning on August 5

This is not the first time.

What happened on August 5, 2024?

Because Japan unexpectedly raised rates to 0.25%, the world crashed:
- The Nikkei 225 plunged 12.4%
- BTC fell from 60,000 to 49,000, a drop of 18%
- The Nasdaq plunged 3.43%
- BIS reports show BTC and ETH losses of up to 20%, triggering global margin calls.

The market took a full 3 weeks to recover.

This time, although the market had expectations in advance (76%).
If the rate hike really happens on December 19, the remaining arbitrage will still continue to liquidate.

There may even be a second crash due to "good news fully priced in."

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05 | What will happen on December 19? Three scenario forecasts

There are 18 days until the meeting, and three potential directions can be forecasted.

Scenario A | Rate hike as scheduled (probability 76%)
Interest rates will be raised from 0.25% to 0.5%.

Short term:
BTC may test 80,000–85,000
Yen rises to 150–152
Arbitrage continues to liquidate

Mid term:
Arbitrage scale drops from $20 trillion to $15 trillion
Global liquidity tightens

Strategy:
Leverage reduced to 2–3 times
Stop-loss set at 80,000
At least 30% cash reserved
Diversify investments, do not go all in

Scenario B | No rate hike (probability 24%)

Short term:
BTC rebounds to 95,000–100,000
Yen may depreciate to 160
Arbitrage trades show short-term recovery

Mid term:
Future rate hike pressure increases
Risk is delayed, not eliminated

Strategy:
Do not chase highs
Reduce positions on highs
Beware of "delayed rate hike" backlash

Scenario C | Rate hike and dovish signals released

Short-term volatility, BTC oscillating in the range of 85,000–92,000.

Strategy:
Build positions in batches
Pay attention to Federal Reserve dynamics
Do not chase rises or sell off at lows

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06 | Three suggestions for traders

We cannot change the macro environment, but we can manage risks.

Suggestion 1: Beware of volatility around December 19

Key dates:
December 17–18: Federal Reserve meeting
December 19: Bank of Japan meeting

Strategy:
Reduce leverage before December 15
Reduce operations around the 19th
Adjust based on results after the 20th

Suggestion 2: Keep a close eye on the yen exchange rate

This is a leading indicator for arbitrage liquidation.

Key thresholds:
Yen falls below 150 (appreciation): Beware of selling
Yen returns to 160 (depreciation): Pressure eases

Suggestion 3: Do not go against macro trends

Yen carry trade is a $20 trillion behemoth.
Individuals cannot fight against this level of liquidity shock.

Core strategy: prioritize capital preservation; build positions in batches; set stop-loss; do not try to catch the bottom

Historical lesson:

Those who bottomed BTC at 60,000 on August 5 were all taken out at the day's low of 49,000.

The real bottom often appears in the 3rd to 4th week after panic.

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In conclusion

The crash on December 1 was not due to Bitcoin's problems, but rather global liquidity issues.

The yen carry trade, maintained for 30 years and worth $20 trillion, is undergoing a reversal.

Every interest rate hike in Japan triggers a wave of liquidations from this machine. As a high-risk asset, cryptocurrencies are always the first to be sold off.

The historical August 5 serves as a warning, while the upcoming December 19 may be a verification.

Remember this core message: In the face of macro currents, surviving is more important than making money.

Reduce leverage. Preserve cash. Set stop-loss. Do not go against the trend.

The market will always give prepared individuals a second chance, but it will not give a second life to those who face liquidation.

On December 19, we await the outcome.