Author: David, Shenchao TechFlow
Original Title: Why Did the Bank of Japan's Interest Rate Hike Scythe Swing at Bitcoin First?
On December 15, Bitcoin fell from $90,000 to $85,616, a single-day drop of over 5%.
There were no major negative events or crashes on this day, and on-chain data showed no abnormal selling pressure. If you only looked at crypto news, it was hard to find a "plausible" reason.
But on the same day, gold was quoted at $4,323 per ounce, down only $1 from the previous day.
One fell 5%, the other barely moved.
If Bitcoin is truly "digital gold," a tool to hedge against inflation and fiat currency devaluation, its performance during risk events should be more like gold's. But this time, its movement clearly resembled that of high-Beta tech stocks on the Nasdaq.
What is driving this round of decline? The answer might be found in Tokyo.
The Butterfly Effect from Tokyo
On December 19, the Bank of Japan will hold its monetary policy meeting. The market expects it to raise interest rates by 25 basis points, increasing the policy rate from 0.5% to 0.75%.
0.75% doesn't sound high, but it is Japan's highest interest rate in nearly 30 years. On prediction markets like Polymarket, traders have priced this rate hike at a 98% probability.
Why would a decision by a central bank far away in Tokyo cause Bitcoin to drop 5% in 48 hours?
It starts with something called the "Yen carry trade."
The logic is actually simple:
Japanese interest rates have long been near zero or even negative, making it almost free to borrow yen. So global hedge funds, asset management institutions, and trading desks borrow large amounts of yen, convert it to US dollars, and then buy higher-yielding assets, such as US Treasury bonds, US stocks, or even cryptocurrencies.
As long as the return on these assets is higher than the cost of borrowing yen, the interest rate differential is profit.
This strategy has existed for decades and is too large to measure precisely. Conservative estimates put it at several hundred billion dollars; if derivative exposures are included, some analysts believe it could be as high as several trillion.
Additionally, Japan has a special status:
It is the largest foreign holder of US Treasury bonds, holding $1.18 trillion in US debt.
This means that changes in Japanese fund flows directly affect the world's most important bond market, which in turn impacts the pricing of all risk assets.
Now, as the Bank of Japan decides to raise interest rates, the underlying logic of this game is shaken.
First, the cost of borrowing yen rises, narrowing the carry trade spread; more troublesome is that rate hike expectations will push the yen to appreciate, and these institutions originally borrowed yen and converted it to dollars to invest.
Now, to repay the loans, they must sell dollar-denominated assets and convert back to yen. The more the yen appreciates, the more assets they need to sell.
This "forced selling" doesn't pick a time or choose assets. Whatever has the best liquidity and is easiest to liquidate gets sold first.
Thus, it's easy to see why Bitcoin, traded 24/7 with no price limits and relatively shallower market depth compared to stocks, is often the first to be sold off.
Looking back at the timeline of the Bank of Japan's previous rate hikes, this speculation is somewhat corroborated by the data:
The most recent instance was on July 31, 2024. After the BOJ announced a rate hike to 0.25%, the yen appreciated against the dollar from 160 to below 140. BTC fell from $65,000 to $50,000 within the following week, a drop of about 23%, wiping $60 billion in market value from the entire crypto market.
According to statistics from several on-chain analysts, after the past three Bank of Japan rate hikes, BTC subsequently experienced drawdowns of over 20%.
The specific start and end points and time windows for these numbers vary, but the direction is highly consistent:
Every time Japan tightens monetary policy, BTC is hit hard.
Therefore, the author believes that what happened on December 15 was essentially the market "front-running." Even before the decision on the 19th was announced, funds had already started withdrawing.
On that day, US BTC ETFs saw a net outflow of $357 million, the largest single-day outflow in nearly two weeks; over $600 million in leveraged long positions were liquidated in the crypto market within 24 hours.
This likely wasn't panic selling by retail investors, but rather a chain reaction of carry trade unwinding.
Is Bitcoin Still Digital Gold?
The previous section explained the mechanism of the yen carry trade, but one question remains unanswered:
Why is BTC always the first to be sold and hurt?
A common explanation is that BTC has "good liquidity and 24/7 trading"—this is true, but it's not sufficient.
The real reason is that BTC has been repriced over the past two years: it is no longer an "alternative asset" independent of traditional finance but has been welded into Wall Street's risk exposure.
In January of last year, the US SEC approved spot Bitcoin ETFs. This was a milestone the crypto industry had waited a decade for. Trillion-dollar asset management giants like BlackRock and Fidelity could finally compliantly include BTC in their clients' investment portfolios.
The money did come. But along with it came an identity shift: the holders of BTC changed.
Previously, those buying BTC were crypto-native players, retail investors, and some aggressive family offices.
Now, those buying BTC are pension funds, hedge funds, and asset allocation models. These institutions also hold US stocks, US bonds, and gold, managing "risk budgets."
When the overall portfolio needs risk reduction, they don't just sell BTC or just sell stocks; they reduce positions proportionally across the board.
Data shows this binding relationship.
In early 2025, the 30-day rolling correlation between BTC and the Nasdaq 100 index once reached 0.80, the highest level since 2022. In contrast, before 2020, this correlation hovered between -0.2 and 0.2, essentially uncorrelated.
More notably, this correlation significantly increases during periods of market stress.
The March 2020 pandemic crash, the Fed's aggressive rate hikes in 2022, tariff concerns in early 2025... every time risk-off sentiment heats up, the linkage between BTC and US stocks tightens.
Institutions in panic don't distinguish between "this is a crypto asset" and "this is a tech stock"; they only see one label: risk exposure.
This leads to an awkward question: is the digital gold narrative still valid?
If you extend the timeline, gold has risen over 60% so far in 2025, its best year since 1979; BTC has drawn down over 30% from its high during the same period.
Both are called assets that hedge against inflation and fiat devaluation, yet they have charted completely opposite curves in the same macro environment.
This isn't to say BTC's long-term value is problematic; its five-year compound annual growth rate still far exceeds that of the S&P 500 and Nasdaq.
But at this current stage, its short-term pricing logic has changed: it is a high-volatility, high-Beta risk asset, not a safe-haven tool.
Understanding this is key to understanding why a mere 25 basis point rate hike by the Bank of Japan could cause BTC to drop thousands of dollars in 48 hours.
It's not because Japanese investors are selling BTC, but because when global liquidity tightens, institutions reduce all risk exposures according to the same logic, and BTC happens to be the most volatile and easiest-to-liquidate link in this chain.
What Will Happen on December 19?
As this article is being written, the Bank of Japan's monetary policy meeting is two days away.
The market has already treated the rate hike as a foregone conclusion. The yield on Japan's 10-year government bond rose to 1.95%, an 18-year high. In other words, the bond market has already priced in the tightening expectations.
If the rate hike is already fully expected, will there still be an impact on the 19th?
Historical experience says: yes, but the intensity depends on the wording.
The impact of a central bank decision is never just about the number itself, but the signal it sends. Even for the same 25 basis point hike, if Bank of Japan Governor Ueda says in the press conference "we will carefully assess future moves based on data," the market will breathe a sigh of relief;
If he says "inflation pressures persist, and further tightening cannot be ruled out," that could be the start of another wave of selling.
Japan's current inflation rate is around 3%, higher than the BOJ's 2% target. The market isn't worried about this one rate hike, but whether Japan is entering a sustained tightening cycle.
If the answer is yes, the unwinding of the yen carry trade is not a one-time event but a process that could last for months.
However, some analysts believe this time might be different.
First, speculative positioning on the yen has shifted from net short to net long. The sharp drop in July 2024 was partly because the market was caught off guard, with large amounts of funds still shorting the yen. Now the positioning has reversed, limiting the room for unexpected appreciation.
Second, Japanese government bond yields have been rising for most of the year, from 1.1% at the start of the year to nearly 2% now. In a sense, the market has "already raised rates itself," and the Bank of Japan is just acknowledging the fait accompli.
Third, the Fed just cut rates by 25 basis points; the general direction of global liquidity is easing. Japan is tightening against the trend, but if US dollar liquidity is sufficiently abundant, it might partially offset the pressure from the yen side.
These factors don't guarantee that BTC won't fall, but they might mean the drop won't be as extreme as in previous instances.
Looking at the performance after past BOJ rate hikes, BTC typically bottoms out within one to two weeks after the decision, then enters consolidation or a rebound. If this pattern still holds, the window from late December to early January might see the highest volatility, but it could also be an opportunity to position after any mispriced sell-off.
Being Accepted, Being Influenced
Stringing the previous sections together, the logical chain is clear:
Bank of Japan rate hike → Yen carry trade unwinding → Global liquidity tightening → Institutions reducing positions according to risk budget → BTC sold first as a high-Beta asset.
In this chain, BTC did nothing wrong.
It was simply placed in a position it cannot control: the end of the global macro liquidity transmission chain.
You might 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. Back then, its correlation with US stocks and bonds was low, and it somewhat resembled an "independent asset class."
After 2024, Wall Street arrived.
BTC was placed into the same risk management framework as stocks and bonds. Its holder structure changed, and so did its pricing logic.
BTC's market cap surged, rising from a few hundred billion dollars to $1.7 trillion. But it also brought a side effect: BTC's immunity to macro events disappeared.
A single sentence from the Fed or a decision by the Bank of Japan can cause it to fluctuate over 5% in a few hours.
If you believed in the "digital gold" narrative, believing it could provide shelter in turbulent times, the price action in 2025 is somewhat disappointing. At least at this current stage, the market is not pricing it as a safe-haven asset.
Perhaps this is just a phase of misalignment. Maybe institutionalization is still in its early stages, and once allocation ratios stabilize, BTC will rediscover its own rhythm. Perhaps the next halving cycle will once again prove the dominance of crypto-native factors...
But until then, if you hold BTC, you need to accept a reality:
You are also holding exposure to global liquidity. What happens in a conference room in Tokyo might determine your account balance next week more than any on-chain indicator.
This is the cost of institutionalization. Whether it's worth it or not, everyone has their own answer.
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