The core impact path of the Bank of Japan's rate hike in December on the cryptocurrency market is the liquidity withdrawal triggered by the closing of yen carry trades, which can be divided into three stages: 'direct impact - systemic transmission - medium to long-term game', with a clear logical chain and early market reactions already observed:
1. Short-term direct impact: Closing of carry trades triggers a selling frenzy
This is the core immediate impact path, rooted in the fact that cryptocurrencies are an important allocation target for yen carry trades.
1. Cost and revenue logic collapse: Japan's long-term low interest rates have spawned yen carry trades amounting to $20 trillion, with investors borrowing yen at low costs, converting them into dollars, and investing in high-yield crypto assets such as Bitcoin and Ethereum to earn interest rate differentials. After a 25 basis point rate hike, the cost of borrowing yen increased from 0.5% to 0.75%, coupled with market expectations of yen appreciation, arbitrage profits were significantly compressed or even turned into losses.
2. Prioritize selling off crypto assets to close positions: Cryptocurrencies have high liquidity and low repositioning costs, making them the preferred assets for carry traders to sell off first. As early as the beginning of December, when interest rate hike expectations warmed, Bitcoin plummeted over 8% first, while Ethereum fell nearly 9%, and the amount of liquidation surged in 24 hours, releasing some closing pressure in advance.
3. International giants follow suit in retreat: Not only retail investors like Mrs. Watanabe but also international investment giants like Buffett, who utilize low-interest arbitrage in yen, will simultaneously reduce their risk exposure by selling off overseas assets, including cryptocurrencies, further amplifying the selling pressure.
2. Medium-term systemic transmission: Dual pressure from liquidity and risk appetite
The chain reaction triggered by the interest rate hike will spread from a single capital behavior to systemic pressure across the entire market.
1. Global liquidity tightening squeezes incremental capital: Japan is the last major central bank to exit ultra-loose policy, and this interest rate hike marks a definitive tightening of global liquidity. The incremental funds that would have flowed into the crypto market will significantly decrease, while Japanese government bond yields reach an 18-year high, attracting global funds back to Japan, exerting 'blood loss' pressure on the crypto market.
2. Declining risk appetite triggers asset rotation: Interest rate hikes will elevate market risk aversion, causing funds to shift from high-risk assets such as cryptocurrencies and tech stocks to low-risk assets like gold and government bonds. The 'risk asset property' of cryptocurrencies is reinforced, and valuation logic is reconstructed due to rising global benchmark interest rates, with the discount rate increase directly reducing their valuation space.
3. Intensified policy divergence exacerbates volatility: Japan's interest rate hike contrasts with the previous Federal Reserve's rate cuts, leading to increased fluctuations in the USD/JPY exchange rate. Cryptocurrencies priced in USD will be affected by these exchange rate transmissions, further amplifying price volatility.
3. Long-term game: Coexistence of pressure relief and structural support
After short-term dramatic fluctuations, the market will gradually digest the impact of interest rate hikes. The medium to long-term trend will depend on the interplay of multiple factors.
1. Expectations are digested in advance, weakening subsequent shocks: Currently, the market probability for a Bank of Japan interest rate hike in December has exceeded 80%, and some pullback pressure has been released in advance. If the rate hike aligns with expectations and the central bank signals 'gradual interest rate hikes', the crypto market is expected to gradually stabilize after oscillations.
2. Domestic funds in Japan may serve as a supplement: The appreciation of the yen will lower the cost for Japanese investors to allocate USD-denominated crypto assets. Combined with recent regulatory optimizations and tax reforms in Japan’s Web3 space, the participation of compliant domestic funds in the crypto market may increase, forming a supplementary force.
3. Asset properties support medium-term trends: When macro policy uncertainty rises, Bitcoin's 'super-sovereign asset' hedging properties will become more pronounced. After Japan's first interest rate hike in 2024, the crypto market previously showed a 'short-term decline, medium-term strengthening' trend, and funds may flow back into high-liquidity crypto assets after deleveraging.
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