Bitcoin retreats ahead of the Bank of Japan's imminent interest rate hike

Source: CritpoTendencia Original Title: Bitcoin Retreats This Monday Ahead of Imminent Rate Hike in Japan Original Link: This Monday, during trading hours on the U.S. stock market, the price of Bitcoin drops sharply to $85,800. This decline is presented as a fear reaction to the specter of a possible interest rate hike in Japan. This reality also affects so-called altcoins.

Apart from the Bank of Japan’s (BoJ) monetary policy decision, this week also presents other significant data for the markets. Among them are the service and manufacturing PMI in the United States, the European Union, and the United Kingdom. Additionally, key CPI inflation data are expected from the North American country.

Other data that should not be underestimated relate to employment figures and statements from some Federal Reserve officials. However, the main focus is on the Japanese central bank’s decision. Although it may seem like a local decision, it has a huge impact on equity markets, including the crypto world.

This is due to the weight of the Japanese economy in the flow of capital toward the U.S. market. Bitcoin retreats by -3.25% in the last 24 hours.

The Possible Impact of the BoJ Decision on Bitcoin

As is evident, the BoJ does not share the strong enthusiasm for economic easing. Therefore, the agency is preparing for an imminent increase in borrowing costs, the first in nearly a year. A 25 basis point increase is expected. This means the rate will rise from 0.5% to 0.75%, the highest in 30 years.

To understand the dynamic between the BoJ’s decisions and equity markets in the U.S., some key elements should be highlighted. The first that stands out is the massive holdings of U.S. Treasury bonds owned by Japan, amounting to more than $1 trillion in debt. This makes Japan a significant player in global capital flows.

A particular factor in this context is the complete unwinding of the yen carry trade. Previously, this has caused significant drops in Bitcoin’s price. Recent rate hikes in Japan caused BTC prices to fall between 20% and 30%.

The yen carry trade involves borrowing at low rates in Japan to invest in higher-yielding assets like Bitcoin, bonds, or stocks. This practice has been popular for decades due to Japan’s traditional policy of maintaining very low interest rates.

When rates rise, the BoJ causes the yen to strengthen, which diminishes gains from the interest rate differential between Japan’s low rates and higher rates in other markets.

How does this manifest in capital flows?

Estimating the amount of capital that would stop flowing into the U.S. after a rate hike in Japan is complex. However, conservative estimates place the leveraged core at hundreds of billions of dollars.

Thus, this could lead to a partial unwind that might remove tens or even hundreds of billions of dollars from risk assets in the U.S. This would reduce liquidity in assets such as bonds, stocks, and cryptocurrencies.

Meanwhile, more alarmist data suggests that a 10-13% yen appreciation, similar to previous rate hikes in Japan, could have devastating effects. This could trigger forced liquidations of between $200 billion and $500 billion, significantly eroding inflows into risk assets.

Bitcoin Price at Risk of Falling to $70,000

Considering past reactions of Bitcoin following rate hikes in Japan, the reaction this time could be painful for investors. A drop of 20% to 30%, similar to the three previous hikes (March, July 2024, and January 2025), could push the pioneer digital currency down to the $70,000 range.

Such a scenario helps explain the recent sharp decline of the currency in the spot market. Meanwhile, in the leveraged derivatives market, liquidations total $571 millions in 24 hours. Of these, $484 million are long positions.

Does all this mean that Bitcoin’s price will inevitably plummet? Not necessarily, but it could.

Final note: Market bets are aligning closely with probabilities. The BoJ’s nine-member board requires at least five votes in favor to approve a monetary policy measure. Recent indicators suggest that the vast majority of members will approve the rate increase. The chances of dissent are slim.