Bank of Japan raises interest rates to a 30-year high! Bitcoin historically drops 30%—is this time an exception?

The Bank of Japan raised interest rates by 25 basis points to 0.75%, reaching the highest level in nearly 30 years. The market fears a repeat of history: since 2024, Bitcoin has plummeted after each BOJ rate hike, with the last three hikes causing Bitcoin prices to fall by 23-31%. However, this time, the yen-dollar exchange rate dropped to 156 yen, and Bitcoin rebounded to $87,000. The key factor is the risk of closing yen arbitrage trades; unless the yen strengthens, the risk remains limited.

The Curse of Bitcoin’s 30% Drop and Three Confirmations

(Source: Trading View)

Since 2024, Bitcoin has sharply declined after each BOJ rate hike, mainly due to the unwinding of yen arbitrage trades. The last three hikes saw Bitcoin prices fall by 23% to 31%. This remarkable consistency has almost made “BOJ rate hikes = Bitcoin crash” an iron law in the market.

The core logic is centered on yen arbitrage trading. When Japanese interest rates are near zero, investors can borrow yen at extremely low costs, then convert to USD to invest in US stocks, bonds, or cryptocurrencies. This trade profits from the interest rate differential and can also earn from exchange rate movements when the yen depreciates. However, when the BOJ raises rates, the cost of borrowing yen increases, squeezing arbitrage margins. More critically, rate hike expectations tend to push the yen higher; if the yen appreciates, arbitrage traders not only lose potential profits but also suffer exchange rate losses. This forces them to close their positions: selling USD assets (including Bitcoin), and buying back yen to repay loans.

Notably, after the BOJ announced a 25 basis point hike in January 2025, Bitcoin prices fell 31%. Experts warn that if this scenario repeats, Bitcoin could drop from around $85,000 to below $70,000. This $70,000 target is not arbitrary but based on the historical pattern of a 31% decline (85,000 × 0.69 ≈ 58,650, adjusted for support levels to 70,000).

Historical Performance of Bitcoin After BOJ Rate Hikes

First hike in 2024: Bitcoin crashes 23%, catching the market off guard

January 2025 hike: Bitcoin plunges 31%, the largest decline on record, from about $100,000 to $69,000

December 2025 hike: Market is highly attentive, but yen weakness eases unwinding pressure, and Bitcoin rebounds to $87,000

These three historical data points show that the rate hike itself is not the decisive factor; the actual movement of the yen exchange rate is crucial. After the first two hikes, the yen appreciated sharply, triggering panic unwinding of arbitrage trades. This time, the yen weakened instead, leading to a completely different market reaction.

Why This Time Is Different: Yen Weakness and USD Strength

After the BOJ rate hike, the yen weakened, the USD strengthened, and Bitcoin prices rebounded. Currently, Bitcoin fluctuates between $85,000 and $88,000. The core reason for this abnormal phenomenon is that the market has fully priced in the rate hike expectations, and the yen-dollar exchange rate has fallen to 156 yen, indicating that the rate hike was insufficient to reverse the yen’s weakness.

The yen-dollar exchange rate has fallen to around 156 yen, fully digesting the rate hike expectations. This suggests that unless the yen strengthens against the dollar, the risk of unwinding yen arbitrage trades remains small. The critical threshold is when the yen appreciates below 150; at that point, the exchange rate losses from arbitrage will exceed interest rate differentials, forcing unwinding. Currently, at 156, there is still profit potential, and the pressure to close positions is limited.

The US 10-year Treasury yield has risen to about 4.14%, reversing a brief dip from the previous trading day. Meanwhile, the dollar index (DXY) has surged to around 98.52, as investors weigh the prospects of the Fed further cutting rates next year after CPI inflation cools. This macro environment of a strengthening dollar offsets some of the impact of Japan’s rate hikes on arbitrage trades.

More importantly, the “fully priced in” effect is at play. Over the past week, the market has extensively discussed and panicked over Japan’s rate hike. During Bitcoin’s decline from $90,000 to $84,450, expectations of a rate hike were the main selling pressure. When the hike actually occurs and aligns with expectations (25 basis points, in line with market consensus), it triggers a rebound as the “anticipated negative” is already reflected. This market psychology is common in technical analysis: the worst news is most feared before it lands, and relief follows once it does.

Short-term Risks vs. Long-term Bullish Outlook

Despite the short-term rebound, Bankless’s 2026 crypto forecast and several analysts warn of short-term risks. Bitcoin and the broader crypto market are on high alert, preparing for volatility from “Triple Witching” and crypto options expirations. About $23 billion in Bitcoin options will expire on December 26, with roughly $1.4 billion in put options near the $85,000 strike, potentially pulling the price toward that level like a magnet.

In the short term, multiple adverse factors persist, consistent with bearish technical signals, market structure, capital flows, and on-chain data. Although Bitcoin has rebounded to $87,000, liquidity tightening and holiday season effects mean selling pressure remains. A break below $85,100 could intensify selling, with the next support at the psychological $80,000 level.

However, the long-term outlook remains bullish. 10x Research states: “While we remain bearish in the short term, we see highly attractive buying opportunities in the next year, setting the stage for larger rallies by the end of 2026, 2027, and 2028.” This split between short-term pessimism and long-term optimism reflects the current market complexity.

The BOJ’s statement indicates: “Following policy adjustments, real interest rates are expected to remain significantly negative, and an accommodative financial environment will continue to strongly support economic activity.” This implies that although nominal rates have risen to 0.75%, considering Japan’s inflation rate of about 2-3%, real interest rates are still negative (0.75% - 2.5% = -1.75%). This environment of negative real interest rates remains accommodative from a monetary policy perspective.

Policy makers hint at further rate hikes in the future. Ueda Kazuo stated that if economic and price trends align with forecasts and improve, they will continue to raise the policy rate. This forward guidance helps manage market expectations; if future rate hikes are gradual and well-communicated, market shocks may be smaller than previous hikes.

For Bitcoin investors, the current situation is at a critical crossroads. Historical patterns show rate hikes lead to declines, but this anomalous rebound suggests market structure has changed. The key variable is the yen exchange rate: if the yen remains weaker than 150, unwinding pressure is limited, and Bitcoin could hold at $85,000. If the yen suddenly strengthens below 145, the historical pattern may repeat, with a sharp drop toward $70,000. The price action in the coming days will reveal the answer.