Ahead of the Bank of Japan's rate hike, why does Bitcoin fall first?

On December 15, Bitcoin dropped from $90,000 to $85,616, a single-day decline of over 5%. There were no major crashes or negative events, and on-chain data showed no abnormal selling pressure. If you only follow crypto news, it’s hard to find a “reasonable” explanation.

Meanwhile, gold prices on the same day were $4,323 per ounce, down only $1 from the previous day.

One asset fell 5%, the other hardly moved.

If Bitcoin truly is “digital gold,” a hedge against inflation and fiat currency depreciation, its performance during risk events should resemble gold’s. But this time, its movement looks more like high Beta tech stocks in the Nasdaq.

What’s 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%.

While 0.75% sounds low, it’s the highest rate in Japan in nearly 30 years. Predictive markets like Polymarket price the probability of this rate hike at 98%.

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

It all starts with something called “yen carry trade.”

The logic is simple:

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

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

This strategy has existed for decades, with an enormous scale—estimated in the trillions of dollars, and possibly higher when including derivatives.

At the same time, Japan holds the largest amount of U.S. Treasuries outside the U.S., with holdings of $1.18 trillion.

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

Now, when the BOJ decides to raise rates, the underlying logic of this game is shaken.

First, borrowing yen becomes more expensive, narrowing arbitrage opportunities; more importantly, rate hike expectations will push the yen higher, and these institutions initially borrowed yen to invest in dollar-denominated assets.

Now, to repay their loans, they must sell dollar assets and convert back to yen. As the yen appreciates, they need to sell more assets.

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 and no daily price limits, and market depth shallower than stocks, is often the first to be hit.

Looking back at the BOJ’s rate hike timeline over recent years, this hypothesis is supported by data:

The most recent was 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 each of the last three BOJ rate hikes, BTC experienced declines of over 20%.

While the exact timing and magnitude vary, the overall direction is consistent:

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

Thus, I believe what happened on December 15 is essentially the market “front-running.” Even before the official decision on the 19th, capital was already exiting.

On that day, US Bitcoin ETF net outflows reached $357 million, the largest in nearly two weeks; over $600 million of leveraged long positions were liquidated within 24 hours.

These aren’t just retail panic sales—they’re chain reactions of arbitrage unwinding.

Is Bitcoin still “digital gold”?

The previous explanation covered the mechanics of yen carry trade, but one question remains:

Why is BTC always the first to be sold off?

A common explanation is that BTC’s “liquidity and 24/7 trading” make it more flexible, but that’s not enough.

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

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

Capital indeed flowed in. But this also changed its identity:

Previously, BTC buyers were crypto-native players, retail investors, and some aggressive family offices.

Now, they are pension funds, hedge funds, and asset allocation models. These institutions hold stocks, bonds, and gold as well, managing “risk budgets.”

When their portfolios need to reduce risk, they don’t just sell BTC or stocks; they scale down proportionally.

Data shows this relationship:

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

More importantly, this correlation tends to spike during market stress:

In March 2020’s pandemic crash, in 2022’s aggressive Fed rate hikes, and early 2025’s tariff fears—whenever risk aversion rises, BTC and US stocks become more tightly linked.

Institutions, in panic, don’t distinguish between “crypto assets” and “tech stocks”—they only see risk exposure.

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

Looking 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 inflation hedges and tools against fiat depreciation, yet in the same macro environment, they’ve charted opposite paths.

This doesn’t mean BTC’s long-term value is questionable; its five-year CAGR still outperforms the S&P 500 and Nasdaq.

But at this stage, its short-term pricing logic has shifted: 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 BOJ can cause BTC to fall thousands of dollars in 48 hours.

It’s not Japanese investors selling BTC; it’s that, in a tightening global liquidity environment, institutions unwind risk across the board, and BTC, being the most volatile and easiest to liquidate, is the first to be affected.

What will happen on December 19?

As I write this, there are two days until the BOJ meeting.

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

If the rate hike is fully expected, will there still be impact on the 19th?

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

The effect of the central bank’s decision is never just the number itself, but the signals it sends. For a 25 basis point hike, if BOJ Governor Ueda says “future policy will be data-dependent and cautious,” markets will breathe a sigh of relief;

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

Currently, Japan’s inflation is around 3%, above the BOJ’s 2% target. The market’s concern isn’t just this rate hike, but whether Japan is entering a sustained tightening cycle.

If the answer is yes, the unraveling of yen carry trade won’t be a one-off event but a process lasting 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 many still shorting the yen. Now, positions have reversed, and upside potential is limited.

Second, Japanese bond yields have risen for over half a year—from 1.1% at the start of the year to nearly 2% now. In a sense, the market has “priced in the hike itself,” with the BOJ just acknowledging the reality.

Third, the Fed just cut rates by 25 basis points, and the overall global liquidity environment remains accommodative. While Japan is tightening, ample dollar liquidity could partly offset yen strength.

These factors don’t guarantee BTC won’t fall, but they suggest the potential decline 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 chance for strategic positioning after a dip.

Who is accepted, who is influenced?

Connecting the dots, the logic chain is quite clear:

BOJ rate hike → Yen carry trade unwinding → Global liquidity tightening → Institutions reduce risk exposure → BTC, as a high Beta asset, is sold first.

In this chain, BTC isn’t doing anything wrong.

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

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 activity, regulatory news. During that period, its correlation with stocks and bonds was low, making it somewhat an “independent asset class.”

After 2024, Wall Street arrived.

BTC was integrated into the same risk management framework as stocks and bonds. Its holder structure changed, and so did its pricing logic.

Market cap soared from hundreds of billions to $1.7 trillion. But a side effect is that BTC’s immunity to macro events has disappeared.

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

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

Maybe this is just a temporary dislocation. Maybe institutionalization is still early, and once allocation ratios 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.

That’s the cost of institutionalization. Whether it’s worth it depends on each individual.

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