The significant reason for the market's violent fluctuations is the speech given by Bank of Japan Governor Kazuo Ueda on December 1 in Nagoya, which was very hawkish. The market interpreted this as Japan preparing to raise interest rates.

So why did Japan's interest rate hike lead to a collapse in Bitcoin?

To understand all of this, we must return to the fundamental logic of the capital markets: liquidity.

There is a saying on Wall Street: "Liquidity is water, and asset prices are boats. When the water rises, the boats rise; when the water falls, the stones are exposed."

For the past few decades, the liquidity in the global capital markets has not solely come from the United States; a significant portion actually comes from Japan. Due to Japan's long-term implementation of a zero interest rate policy (ZIRP) and even negative interest rate policy (NIRP), combined with an extremely loose monetary environment, it has effectively acted as a cheap funding ATM for the global financial system.

According to a report released by the Ministry of Finance Japan, by the end of 2023, Japan's net foreign asset balance reached a record 471.3 trillion yen (approximately 3 trillion USD).

So why does a zero interest rate make Japan the ATM of the global capital markets? This brings us to the topic of yen carry trade.

In simple terms, Wall Street and global speculators borrow yen at nearly 0% cost in Japan, convert it into dollars, and invest in high-yield assets like Bitcoin and U.S. stocks. It's like someone is lending you money for free to trade cryptocurrencies; would you be happy with an interest-free loan? This way, tens of trillions of dollars have been borrowed.

Now that Japan is raising interest rates, what will this operation trigger? It means there will be no more free money; the borrowed funds will start to incur interest, leading to reduced profits, and investors will begin to close their positions. In this, U.S. Treasuries play an important role.

Japanese investors are the largest foreign holders of U.S. Treasuries. According to TIC data from the U.S. Department of the Treasury, as of early 2024, Japan held approximately 1.15 trillion USD in U.S. Treasuries, maintaining its position as the world's largest holder.

When the Bank of Japan raises interest rates, the yields on Japanese government bonds (JGB) begin to rise (for example, the 10-year Japanese government bond yield surpasses 1%). This means that Japanese money no longer needs to take on the risk of exchange rate fluctuations to buy U.S. Treasuries; instead, it chooses to sell U.S. Treasuries and redirect funds back to Japan to purchase domestic bonds.

The selling of U.S. Treasuries leads to a decline in their prices, which in turn causes yields to rise; rising U.S. Treasury yields mean that the global cost of dollar borrowing increases. This introduces risk to global risk assets. Looking back at the black swan event of 2020, Bitcoin has always been the first risk asset to be abandoned by capital; after all, it operates as a 24/7 casino and is the least data-supported tech asset. Today, it still appears to be the first one to be forsaken.

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