Under global liquidity tightening, why has Bitcoin become the primary victim?

Market Fluctuations in the Context of Macroeconomics

Recently, Bitcoin has faced correction pressures, falling from over $90,000 to around $85,600, with a single-day decline of over 5%. On the surface, on-chain data shows no anomalies, and there are no major negative events in the market. However, if we shift our focus to the global macro financial landscape, the answer becomes clear.

During the same period, gold prices only saw a slight correction of $1, while Nasdaq tech stocks faced significant pressure. This divergence reflects a fundamental change in Bitcoin’s identity—it is no longer an “alternative asset” independent of traditional finance but is now deeply integrated into the global capital markets as a risk exposure.

Global Impact of Yen Arbitrage Trading

To understand current market dynamics, we must start from Tokyo.

The Bank of Japan is preparing for a rate hike decision, with market expectations of a 25 basis point increase, raising the policy rate from 0.5% to 0.75%. While this level seems moderate, it is actually the highest interest rate in Japan in nearly 30 years. The market predicts a 98% probability of this rate hike.

Behind this lies a decades-old global arbitrage logic:

Because Japan’s interest rates have been near zero or negative for a long time, borrowing costs for yen are extremely low. Global hedge funds, asset management firms, and trading desks have thus borrowed large amounts of yen, converted to USD, and invested in high-yield assets—U.S. Treasuries, U.S. stocks, and cryptocurrencies—all of which have become targets. As long as these assets’ returns exceed the cost of yen financing, the interest rate differential yields profit.

Conservatively estimated, this arbitrage scale reaches hundreds of billions of dollars; including derivatives exposure, some analysts believe it could be in the trillions. Meanwhile, Japan, as the largest foreign holder of U.S. Treasuries with holdings of $1.18 trillion, directly influences the global bond market through capital flows, which in turn affects the pricing of all risk assets.

When the BOJ decides to tighten policy, this game’s foundation is shaken:

First, borrowing costs for yen rise, narrowing arbitrage opportunities; second, expectations of rate hikes push the yen higher. These institutions initially borrowed yen, converted to dollars to invest, but now need to repay, which means selling USD assets and converting back to yen. The larger the yen appreciation, the more assets they need to sell.

This “forced exit” does not carefully select timing or assets but prioritizes the most liquid and easily realizable assets. Bitcoin, with 24-hour trading and no daily limit, but with market depth shallower than stocks, often bears the brunt.

Historical data confirms this pattern. In late July 2024, after the BOJ raised rates to 0.25%, the yen appreciated below 140 against the dollar. Within a week, Bitcoin dropped from $65,000 to $50,000, a 23% decline, evaporating over $60 billion in market value. According to multiple on-chain analysts, after the last three rate hikes by the BOJ, Bitcoin experienced declines of over 20%.

Fundamental Shift in Bitcoin’s Identity

Why does Bitcoin always get hit first? Liquidity advantage alone is insufficient. The real reason is that Bitcoin has undergone a deep identity restructuring over the past two years.

In early 2024, the US SEC approved spot Bitcoin ETFs, ushering in a new era for the crypto industry. Major asset managers like BlackRock and Fidelity, managing trillions, could now legally include Bitcoin in client portfolios. While capital influx was substantial, it also fundamentally changed the holder structure.

Previously, Bitcoin was mainly bought by crypto-native players, retail investors, and aggressive family offices. Now, buyers include pension funds, hedge funds, and institutional allocators using algorithmic strategies. These institutions hold stocks, bonds, and gold simultaneously, managing risk budgets. When they need to reduce overall risk, they do not just sell Bitcoin or stocks but reduce positions proportionally across assets.

This correlation is clearly visible in data. In early 2025, the 30-day rolling correlation between Bitcoin and the Nasdaq 100 reached 0.80, the highest since 2022. In contrast, before 2020, this correlation was mostly between -0.2 and 0.2, essentially uncorrelated.

More importantly, this correlation tends to spike during market stress. During the March 2020 pandemic crash, the 2022 Fed aggressive rate hikes, and early 2025 tariff expectations, each risk sentiment surge caused Bitcoin and US stocks to become more tightly linked. During panic, institutions do not distinguish between “crypto assets” and “tech stocks”; they only see one label: risk exposure.

The Break of the Digital Gold Narrative

This raises an awkward question: Is the narrative of digital gold still valid?

Since 2025, gold has risen over 60%, marking its best annual performance since 1979; meanwhile, Bitcoin retraced over 30% from its high. Both are touted as assets to hedge inflation and currency devaluation, yet they have moved in completely opposite directions under the same macro environment.

This does not mean Bitcoin’s long-term value is in question. Its five-year compound annual return still far exceeds the S&P 500 and Nasdaq. But at this stage, the short-term pricing logic has changed: Bitcoin is now a high-volatility, high-beta risk asset, not a hedge.

Understanding this helps explain why a 25 basis point rate hike by the BOJ could pressure Bitcoin by thousands of dollars within 48 hours. It’s not because Japanese investors are selling Bitcoin, but because, during global liquidity tightening, institutions reduce all risk exposures following the same logic, and Bitcoin happens to be the most volatile and easiest to liquidate link in that chain.

Possible Scenarios After the Central Bank Decision

Markets have already priced in the rate hike as a fact. The 10-year Japanese government bond yield has risen to 1.95%, a 18-year high. The bond market has pre-emptively reflected tightening expectations.

If the rate hike is fully anticipated, will there still be shocks on the decision day? Historical experience suggests yes, but the magnitude depends on the central bank’s wording. A decision with the same rate increase but different forward guidance can lead to very different market reactions.

Currently, Japan’s inflation rate is around 3%, above the BOJ’s 2% target. The real concern is not this rate hike itself but whether Japan is entering a sustained tightening cycle. If so, the unraveling of yen arbitrage trades will not be a one-time event but a gradual process over months.

However, some analysts point to positive factors. First, speculative yen positions have shifted from net short to net long, limiting unexpected appreciation; second, Japanese bond yields have been rising for over half a year, effectively “self-hiking” in a sense, with the BOJ merely acknowledging the reality; third, the Fed has just completed rate cuts, and global liquidity remains generally loose, with ample USD possibly offsetting some yen pressure.

These factors do not guarantee Bitcoin will stop being pressured, but they suggest declines may not be as extreme as in previous episodes. Historical patterns show Bitcoin often bottoms within one to two weeks after a central bank decision, then consolidates or rebounds. If this pattern holds, late December to early January could be the most volatile period, also potentially an opportunity for a post-correction setup.

The New Normal in an Institutionalized Era

Connecting the above logic, the causal chain is clear:

BOJ tightens policy → Yen arbitrage unwinds → Global liquidity contracts → Institutions adjust risk budgets → Bitcoin, as a high-beta asset, is sold first.

In this chain, Bitcoin is not at fault; it is simply placed at a position beyond its control—the end of the global macro liquidity transmission chain.

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

After 2024, Wall Street’s entry changed everything.

Bitcoin is now incorporated into risk management frameworks similar to stocks and bonds. The holder structure has changed, and so has the pricing logic. Its market cap has surged from hundreds of billions to $1.8 trillion, creating wealth but also side effects—Bitcoin’s immunity to macro events has disappeared.

A single statement from the Fed or a decision by the BOJ can trigger over 5% volatility within hours.

If one still believes in the “digital gold” narrative—that it can provide refuge amid turmoil—2025’s performance may be disappointing. At least for now, the market is not pricing it as a safe haven.

Perhaps this is just a temporary dislocation. Perhaps institutional allocations are still in early stages; once holdings stabilize, Bitcoin may regain its rhythm. Maybe the next halving cycle will reaffirm the dominance of crypto-native factors…

But until then, holding Bitcoin also means accepting a harsh reality: You are also exposed to global liquidity risks.

Decisions made in Tokyo’s conference room may influence next week’s account performance more than any on-chain indicator. This is the cost of being institutionalized—whether it’s worth it is a question each individual must answer.