Under the Bank of Japan's rate hike scythe, BTC exchange for USD faces new challenges

A scene in mid-December 2024 triggered global market attention: Bitcoin dropped from $90,000 to $85,616 within 48 hours, a single-day decline of over 5%. In stark contrast, gold prices remained almost unchanged during the same period. This is not a storm within the crypto circle, but a “tsunami” from Tokyo—Japan’s central bank is about to implement the largest interest rate hike in nearly 30 years. As of January 2026, BTC has adjusted to around $88,540, with a market cap returning to $1.77 trillion, but the underlying mechanism warrants in-depth understanding.

Yen Arbitrage Liquidation Triggers Global Liquidity Shock

It all begins with a seemingly unrelated financial instrument: Yen arbitrage trading.

The Bank of Japan has maintained near-zero or negative interest rates for a long time, creating the world’s cheapest borrowing source. Hedge funds, asset managers, and trading desks profit from a seemingly simple strategy: borrow yen, exchange for dollars, invest in high-yield global assets, and earn the interest spread. U.S. Treasuries, U.S. stocks, and Bitcoin are all within this trading scope.

This strategy has existed for decades, with an estimated scale of hundreds of billions of dollars. When derivatives exposure is included, the total could reach trillions. Meanwhile, Japan, as the largest foreign holder of U.S. debt with $1.18 trillion in U.S. Treasuries, directly influences the world’s most important bond market through capital flows.

When the BOJ announces a rate hike, the entire game logic is shaken:

First, the cost of borrowing yen rises. The arbitrage space quickly narrows, making this once-stable income source less profitable.

Second, and more critically, the yen appreciates. Rate hike expectations push up the yen’s value. These institutions initially borrowed yen, converted to dollars to invest, and now face difficulties when repaying: they need to sell dollar assets to buy yen. The stronger the yen, the more assets they must sell.

This “forced selling” does not happen gradually or selectively. During frantic liquidation, the most liquid and easily realizable assets are sold first. Bitcoin, traded 24/7 without daily price limits, with market depth shallower than traditional stocks, often becomes the easiest to dump.

Historical data confirms this mechanism:

• July 31, 2024: After the BOJ announced a rate hike to 0.25%, the yen appreciated from 160 to below 140 against the dollar. During this period, BTC fell from $65,000 to $50,000 within a week, a decline of about 23%, evaporating $60 billion in crypto market cap.

• In the three previous BOJ rate hikes: each was accompanied by over 20% retracements in BTC, with highly consistent direction.

The December 15 decline was essentially a “front-running” move. Before the official policy meeting on December 19, funds had already begun to exit early. On that day, US spot Bitcoin ETF net outflows reached $357 million, the largest single-day outflow in nearly two weeks; over $600 million of leverage longs were liquidated within 24 hours. This was not retail panic but a chain reaction of arbitrage liquidations.

Institutional Reshaping of BTC Pricing Logic

But there’s a deeper question: Why is Bitcoin always the first to be sold?

Superficially, it’s “liquidity and 24/7 trading,” which is true. But the real reason traces back to a watershed moment in January 2024—the US SEC approved a spot Bitcoin ETF.

This milestone, long awaited by the crypto industry, changed everything. Giants like BlackRock and Fidelity could now legally include BTC in client portfolios. Capital flows continued steadily, but a transformation in identity also occurred.

The structure of BTC holders fundamentally changed:

• Before: Crypto-native players, retail investors, aggressive family offices
• After: Pension funds, hedge funds, asset allocation models

These institutions hold stocks, bonds, and gold simultaneously, managing “risk budgets.” When the overall portfolio needs to reduce risk, they do not sell only BTC or only stocks but reduce positions proportionally across all assets.

Data clearly reflects this linkage:

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

More concerning is that this correlation tends to spike during market stress. During the March 2020 pandemic crash, the 2022 Fed aggressive rate hikes, and early 2025 tariff fears, risk aversion increased, and BTC’s linkage with US stocks tightened. During panic, institutions do not distinguish “crypto assets” from “tech stocks”; they only see one thing: risk exposure.

Embarrassing Break of the Digital Gold Narrative

This raises a disappointing question for believers: Can the narrative of digital gold still hold?

Since early 2025, gold has risen over 60%, the best performance since 1979. Meanwhile, Bitcoin retraced over 30% from its high. Both are promoted as assets to hedge inflation and currency devaluation, yet in the same macro environment, they charted completely opposite trajectories.

This does not mean BTC’s long-term value is flawed. Its five-year CAGR still far exceeds the S&P 500 and Nasdaq. But in the current phase, its short-term pricing logic has changed: a high-volatility, high-beta risk asset, not a safe haven.

Therefore, you can understand why a 25 basis point rate hike by the BOJ can cause BTC to face such a large USD exchange rate shock within 48 hours. It’s not because Japanese investors are collectively selling BTC, but because when global liquidity tightens, institutions reduce all risk exposures following the same logic, and BTC happens to be the most volatile and easiest to liquidate link in that chain.

Volatility Window Under Liquidity Tightening

Time has advanced to January 2026. The key meeting is now history; the BOJ has announced the rate hike as scheduled, and yen appreciation has begun. The market now faces the question: How long will this shock last?

Based on past BOJ rate hikes, BTC usually bottoms 1-2 weeks after the decision, then consolidates or rebounds. If this pattern holds, the extreme volatility phase has likely passed.

However, some factors may mitigate the severity:

First, speculative positions on the yen have reversed. The sharp decline in July 2024 was partly due to market surprise, with large short yen positions. Now, the position has reversed, and the space for yen appreciation is limited.

Second, pricing has already fully reflected the move. Japanese government bond yields rose from 1.1% at the start of the year to nearly 2%, and the market has “priced in” the rate hike; the central bank is just acknowledging the reality.

Third, the Fed is cutting rates. Global liquidity remains generally loose. While Japan tightens, ample dollar liquidity could partially offset yen pressure.

These factors do not guarantee BTC will stop falling, but they suggest the recent decline may not be as extreme as in July 2024.

The New Normal in the ETF Era

Connecting the entire chain, the causal relationship is clear:

Japan’s rate hike → Yen arbitrage liquidation → Global liquidity tightening → Institutions reduce risk exposure → BTC, as a high-beta asset, is sold first

In this chain, Bitcoin has done nothing wrong. It is simply placed in an uncontrollable position—the end of the global macro liquidity transmission chain.

This is the new normal that the ETF era must accept.

Before 2024, BTC’s price movements were mainly driven by native crypto factors: halving cycles, on-chain data, exchange dynamics, regulatory news. During that time, its correlation with stocks and bonds was low, making it somewhat an “independent asset class.”

After 2024, Wall Street entered the scene. BTC was incorporated into the same risk management framework as stocks and bonds. The holder structure changed, and so did the pricing logic. BTC’s market cap soared from hundreds of billions to $1.77 trillion, but a side effect emerged: BTC’s immunity to macro events disappeared.

A single statement from the Fed or a decision by the BOJ can cause BTC to fluctuate over 5% within hours. USD policy and JPY policy now directly influence BTC/USD exchange rate expectations.

If you still believe in the “digital gold” narrative, thinking it can serve as a safe haven in chaos, the 2025 performance is indeed disappointing. At least for now, the market does not price BTC as a safe asset.

Perhaps this is just a temporary dislocation. Perhaps institutionalization is still in its early stages; once allocation proportions stabilize, BTC will find its rhythm again. Maybe the next halving cycle will once again demonstrate the dominance of crypto-native factors…

But until then, if you hold BTC, you must accept a reality: You are betting on global liquidity. A meeting in Tokyo, a decision by the Fed, can influence your account’s gains or losses more than any on-chain indicator next week.

This is the cost of institutionalization. Whether this cost is worth it is each person’s own judgment.