Written by: David, TechFlow TechFlow
On December 15, Bitcoin fell from $90,000 to $85,616, a single-day drop of more than 5%.
There were no major scandals or negative events that day, and the on-chain data didn't show any unusual selling pressure. If you only look at the news in the crypto, it's hard to find a plausible reason for this.
On the same day, however, gold was priced at $4,323 per ounce, down only $1 from the previous day.
One fell by 5%, while the other barely moved.
If Bitcoin truly were "digital gold," a tool to hedge against inflation and fiat currency devaluation, its performance in the face of risk events should resemble that of gold. However, its recent price action clearly resembles that of high-beta tech stocks on the Nasdaq.
What is driving this decline? The answer may lie in Tokyo.
The Butterfly Effect in Tokyo
The Bank of Japan will hold its policy meeting on December 19. The market expects it to raise interest rates by 25 basis points, increasing the policy rate from 0.5% to 0.75%.
0.75% may not sound high, but it's Japan's highest interest rate in nearly 30 years. In prediction markets like Polymarket, traders are pricing in a 98% probability of this rate hike.
Why would a decision by a central bank in Tokyo cause Bitcoin to drop by 5% in 48 hours?
This all started with something called "yen carry trade".
The logic is actually quite simple:
With Japanese interest rates hovering near zero or even negative for a long time, borrowing yen was practically free. As a result, hedge funds, asset management firms, and trading desks worldwide borrowed large amounts of yen, converted it into US dollars, and then used the money to buy higher-yielding assets, such as US Treasury bonds, US stocks, and cryptocurrencies.
As long as the returns on these assets are higher than the cost of borrowing in yen, the interest rate differential is the profit.
This strategy has existed for decades and is too large to be accurately quantified. Conservative estimates put it at several hundred billion dollars, and if derivatives exposure is included, some analysts believe it could reach trillions.
At the same time, Japan has another special identity:
It is the largest foreign holder of U.S. Treasury bonds , holding $1.18 trillion in U.S. debt .
This means that changes in Japan's capital flows will directly affect the world's most important bond market, and in turn, the pricing of all risky assets.
Now, with the Bank of Japan deciding to raise interest rates, the underlying logic of this game has been shaken.
First, the cost of borrowing yen has increased, narrowing arbitrage opportunities; more troublesome is that expectations of interest rate hikes will drive the yen to appreciate, and these institutions initially borrowed yen and exchanged it for dollars to invest.
To repay the debt, they need to sell their dollar assets and exchange them for yen. The more the yen appreciates, the more assets they need to sell.
This kind of "forced selling" doesn't discriminate based on timing or type of asset. It prioritizes selling whatever has the best liquidity and is easiest to convert into cash.
Therefore, it's easy to see that Bitcoin, with its 24-hour trading without price limits and a relatively shallower market depth compared to stocks, is often the most likely to be the first to be dumped.
Looking back at the timeline of the Bank of Japan's interest rate hikes over the past few years, this speculation has been somewhat corroborated by the data:
The most recent instance was on July 31, 2024. After the BOJ announced an interest rate hike to 0.25%, the yen appreciated against the dollar from 160 to below 140, and BTC fell from $65,000 to $50,000 in the following week, a drop of about 23%, wiping out $60 billion in market capitalization across the entire crypto market.
According to statistics from multiple on-chain analysts, after the Bank of Japan raised interest rates three times in the past, BTC experienced a pullback of more than 20%.
These figures have different start and end points and time windows, but they are highly consistent in direction:
Every time Japan tightens its monetary policy, Bitcoin is hit hardest.
Therefore, I believe that what happened on December 15th was essentially the market "rushing ahead." Before the decision on the 19th was even announced, funds had already begun to withdraw.
On that day, the US BTC ETF saw a net outflow of $357 million, the largest single-day outflow in nearly two weeks; within 24 hours, more than $600 million of leveraged long positions in the crypto market were liquidated.
These are probably not retail investors panicking, but rather a chain reaction caused by the liquidation of arbitrage trades.
Is Bitcoin still digital gold?
The mechanism of yen carry trades has been explained above, but one question remains unanswered:
Why is BTC always the first to be hurt and sold off?
A common claim is that BTC has "good liquidity and is traded 24 hours a day," which is true, but not enough.
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 U.S. Securities and Exchange Commission (SEC) approved a spot Bitcoin ETF. This was a milestone that the crypto industry had waited a decade for, finally allowing trillion-dollar asset management giants like BlackRock and Fidelity to legally include BTC in their clients' portfolios.
The funds have indeed arrived. But this has brought with it a change in identity: the holders of BTC have changed.
Previously, those who bought BTC were crypto natives, retail investors, and some aggressive family offices.
Currently, those buying BTC are pension funds, hedge funds, and asset allocation models. These institutions also hold US stocks, US bonds, and gold, and are managing "risk budgets."
When the overall portfolio needs to reduce risk, they will not sell only BTC or only stocks, but will reduce their holdings proportionally.
The data reveals this binding relationship.
In early 2025, the 30-day rolling correlation between BTC and the Nasdaq 100 index reached 0.80, the highest level since 2022. In contrast, before 2020, this correlation hovered between -0.2 and 0.2 for many years, and could be considered essentially uncorrelated.
More notably, this correlation increases significantly during periods of market stress.
The March 2020 stock market crash due to the pandemic, the Fed's aggressive interest rate hikes in 2022, and tariff concerns in early 2025... Every time risk aversion intensifies, the correlation between Bitcoin and US stocks becomes even stronger.
When institutions are in a panic, they don't distinguish between "this is a crypto asset" and "this is a tech stock"; they only look at one label: risk exposure.
This raises an awkward question: does the narrative of digital gold still hold true?
If we extend the timeframe, gold has risen by more than 60% since 2025, making it the best-performing year since 1979; BTC has retreated by more than 30% from its peak during the same period.
Both assets, touted as hedges against inflation and fiat currency devaluation, have exhibited completely opposite trends in the same macroeconomic environment.
This is not to say that there is a problem with the long-term value of BTC; its five-year compound annual return still far exceeds that of the S&P 500 and Nasdaq.
However, at this stage, its short-term pricing logic has changed: it is a highly volatile, high-beta risky asset, rather than a safe-haven tool.
Understanding this is key to understanding why a 25 basis point rate hike by the Bank of Japan could cause Bitcoin to drop by thousands of dollars in 48 hours.
It's not because Japanese investors are selling BTC, but because when global liquidity tightens, institutions will 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 19th?
As I write this, there are still two days until the Bank of Japan's interest rate meeting.
The market has already priced in interest rate hikes. The yield on Japanese 10-year government bonds has risen to 1.95%, the highest in 18 years. In other words, the bond market has already priced in tightening expectations.
If the interest rate hike has been fully anticipated, will there still be an impact on the 19th?
Historical experience tells us: yes, but the intensity depends on the wording.
The impact of central bank decisions is never just the numbers themselves, but the signals they send. For example, if Bank of Japan Governor Kazuo Ueda says at the press conference that "we will carefully assess the situation based on data" when raising interest rates by 25 basis points, the market will breathe a sigh of relief.
If he says "inflationary pressures persist and further tightening cannot be ruled out," that could be the start of another wave of selling.
Japan's inflation rate is currently around 3%, higher than the BOJ's 2% target. The market's concern isn't about this rate hike, but rather whether Japan is entering a prolonged period of tightening.
If the answer is yes, the collapse of the yen carry trade was not a one-off event, but a process that lasted for several months.
However, some analysts believe this time may be different.
First, speculative funds have shifted from a net short to a net long position in the yen. The sharp drop in July 2024 was partly due to market surprise, as a large amount of capital was still short the yen at the time. Now that the position has reversed, the potential for unexpected appreciation is limited.
Secondly, Japanese government bond yields have been rising for more than half a year, from 1.1% at the beginning of the year to nearly 2% now. In a sense, the market has already "raised interest rates itself," and the Bank of Japan is simply acknowledging the fait accompli.
Third, the Federal Reserve just cut interest rates by 25 basis points, and the overall trend of global liquidity is towards easing. Japan is tightening in the opposite direction, but if dollar liquidity is ample, it may partially offset the pressure on the yen.
These factors cannot guarantee that BTC will not fall, but they may mean that this drop will not be as extreme as the previous ones.
Historically, BTC has typically bottomed out within one to two weeks of the BOJ rate hike, followed by consolidation or a rebound. If this pattern holds true, late December to early January could be the most volatile period, but it could also present an opportunity to buy after a period of overselling.
To be accepted by others, to be influenced by others
Connecting the preceding text, the logical chain is actually quite clear:
Bank of Japan raises interest rates → Yen carry trades close out → Global liquidity tightens → Institutions reduce positions based on risk budgets → BTC, as a high-beta asset, is prioritized for selling.
In this chain, BTC did nothing wrong.
It was simply placed in a position it couldn't control, at the end of the transmission chain of global macro liquidity.
You may not be able to accept it, but this is the new normal in the ETF era.
Before 2024, the rise and fall of BTC was mainly driven by crypto-native factors: halving cycles, on-chain data, exchange dynamics, and regulatory news. At that time, its correlation with US stocks and US bonds was very low, and it did indeed resemble an "independent asset class" to some extent.
After 2024, Wall Street will arrive.
Bitcoin has been placed within the same risk management framework as stocks and bonds. Its holder structure has changed, and its pricing logic has changed accordingly.
Bitcoin's market capitalization surged from several hundred billion dollars to 1.7 trillion dollars. But this also brought a side effect: Bitcoin's immunity to macroeconomic events disappeared.
A single statement from the Federal Reserve or a decision by the Bank of Japan can cause it to fluctuate by more than 5% within a few hours.
If you believe in the narrative of "digital gold" and think it can provide shelter in turbulent times, then the performance in 2025 has been somewhat disappointing. At least for now, the market is not pricing it as a safe-haven asset.
Perhaps this is just a temporary misalignment. Perhaps institutionalization is still in its early stages, and once the allocation ratio stabilizes, BTC will find its own rhythm again. Perhaps 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 this reality:
You are also holding exposure to global liquidity. What happens in a Tokyo conference room may determine your account balance next week more than any on-chain metric.
This is the price of institutionalization. As for whether it's worth it, everyone has their own answer.
