Why does the Japanese Central Bank's interest rate hike first target Bitcoin?

Author: David, Deep Tide TechFlow

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

There were no major crashes or negative events that day, and on-chain data showed no abnormal selling pressure. If you only follow crypto news, it’s hard to find a “plausible” reason.

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

One dropped 5%, the other hardly moved.

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

What is 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 bps rate hike, raising the policy rate from 0.5% to 0.75%.

0.75% sounds low, but it’s the highest rate in Japan in nearly 30 years. In prediction markets like Polymarket, traders are pricing in a 98% chance of this rate hike.

Why would a decision made by a distant central bank in Tokyo cause Bitcoin to fall 5% within 48 hours?

It all starts with something called “yen arbitrage trading.”

The logic is simple:

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

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

This strategy has existed for decades, with a scale so large it’s hard to quantify precisely. Conservative estimates reach hundreds of billions of dollars, and some analysts believe it could be several trillions when including derivatives.

At the same time, Japan has a special status:

It is the largest overseas holder of U.S. Treasuries, holding $1.18 trillion.

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

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

First, the cost of borrowing yen rises, narrowing arbitrage opportunities; more troublingly, rate hike expectations will push the yen higher, and these institutions initially invested by converting yen to dollars to buy assets.

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

This “forced selling” doesn’t pick timing or assets. It sells whatever is most liquid and easiest to liquidate first.

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 timeline of Japan’s rate hikes over the past few years, this hypothesis is somewhat supported by data:

The most recent was July 31, 2024. After the BOJ announced a rate hike to 0.25%, the yen/USD exchange rate dropped from 160 to below 140. Within a week, BTC fell 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 three previous BOJ rate hikes, BTC experienced declines of over 20%.

While the exact start and end points and time windows vary, the overall direction is consistent:

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

Thus, the author believes that what happened on December 15 is essentially the market “front-running.” Even before the official announcement on the 19th, funds had already begun to exit early.

That day, US Bitcoin ETF net outflows reached $357 million, the largest single-day outflow in nearly two weeks; over $600 million in leveraged longs were liquidated within 24 hours.

These are unlikely to be retail panic sales but chain reactions of arbitrage unwinding.

Is Bitcoin still digital gold?

The previous explanation covered the mechanics of yen arbitrage trading, but one question remains:

Why is BTC always the first to be sold off when things go wrong?

A common explanation is that BTC has “good liquidity and 24-hour trading,” which is true, but not enough.

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

Last January, 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 with it came a change in identity: the holders of BTC changed.

Previously, BTC was bought by crypto-native players, retail investors, and some aggressive family offices.

Now, it’s institutional investors like pension funds, hedge funds, and asset allocation models. These institutions hold stocks, bonds, and gold as well, managing “risk budgets.”

When their overall portfolios need to reduce risk, they don’t just sell BTC or stocks alone but reduce positions proportionally.

Data shows this binding relationship clearly.

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 hovered between -0.2 and 0.2, essentially uncorrelated.

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

During the March 2020 pandemic crash, the 2022 Fed aggressive rate hikes, and early 2025 tariff concerns… each time risk aversion increased, BTC and US stocks moved more tightly together.

Institutions, in panic, don’t distinguish between “cryptos” and “tech stocks”; they only see one label: risk exposure.

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

If we look longer-term, gold has gained over 60% since 2025, making it the best year since 1979; meanwhile, BTC has retraced over 30% from its high.

Both are touted as assets to hedge inflation and fight fiat devaluation, yet in the same macro environment, they have diverged completely.

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

But at this stage, its short-term pricing logic has changed: it’s a high-volatility, high Beta risk asset, not a hedge.

Understanding this helps explain why a 25 bps rate hike by the Bank of Japan can cause BTC to drop thousands of dollars within 48 hours.

It’s not because Japanese investors are selling BTC, but because, when global liquidity tightens, institutions unwind all risk exposures using the same logic, and BTC, being the most volatile and easiest to liquidate link in the chain, is the first to be affected.

What will happen on December 19?

When writing this article, there are two days left before the Bank of Japan’s policy meeting.

The market has already priced in the 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 shocks on the 19th?

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

The impact of a central bank decision is never just the numbers but the signals it sends. For example, a 25 bps hike accompanied by “future assessments based on data” might reassure markets;

Conversely, if they say “inflation pressures persist, further tightening cannot be ruled out,” it could trigger another wave of selling.

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

If the answer is yes, the disintegration of yen arbitrage trading won’t be a one-time event but a process lasting 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 market surprise; at that time, many were shorting the yen. Now, positions have reversed, and upside potential is limited.

Second, Japanese bond yields have risen for over half a year, from about 1.1% at the start of the year to nearly 2% now. In a sense, the market has “already raised rates itself,” and the BOJ is just acknowledging the reality.

Third, the Fed recently cut rates by 25 bps, and the overall global liquidity environment remains accommodative. While Japan is tightening in reverse, ample dollar liquidity could partially offset yen strength.

These factors don’t guarantee BTC won’t fall, but they suggest the decline might not be as severe as previous episodes.

Looking at past BOJ rate hikes, BTC typically 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 potential opportunity for a false breakout.

Acceptance and Influence

Connecting the dots, the logic chain is quite clear:

Bank of Japan rate hike → Yen arbitrage unwinding → Global liquidity tightening → Institutions reduce risk exposure → BTC, as a high Beta asset, is sold first.

In this chain, BTC hasn’t done anything wrong.

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

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 dynamics, regulatory news. During that period, its correlation with stocks and bonds was low, and it was somewhat like 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 its pricing logic shifted.

BTC’s market cap surged from hundreds of billions to $1.7 trillion. But this also brought a side effect: its immunity to macro events diminished.

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

If you believe in the “digital gold” narrative, that it can provide refuge in chaos, the outlook for 2025 may be disappointing. At least for now, the market isn’t pricing it as a safe haven.

Perhaps this is just a temporary dislocation. Perhaps institutionalization is still in early stages, and once allocation proportions stabilize, BTC will find its rhythm again. Maybe the next halving cycle will once again prove 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.

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

(The above content is authorized for excerpt and reproduction by our partner PANews. Original link | Source: Deep Tide TechFlow)

Disclaimer: This article is for market information only. All content and opinions are for reference only and do not constitute investment advice. They do not represent the objective views or positions of BlockTalk. Investors should make their own decisions and transactions. The author and BlockTalk are not responsible for any direct or indirect losses resulting from investor transactions._

Tags: Crypto analysis, rate hike, arbitrage, market, price, investment, yen, Japan, Bitcoin, trend