Bitcoin Drops to $84K: Are Japan's Bonds to Blame, or Is There More Happening?

Bitcoin Drops to $84K: Are Japan's Bonds to Blame, or Is There More Happening?

Key Takeaways:

Concerns over stablecoins, regulatory pressures, and a decrease in traders' risk appetite have impacted Bitcoin more than movements in Japan’s bond market.
Eroding confidence in global growth and the stress faced by digital asset reserve companies have intensified Bitcoin sell-offs and triggered stop losses.

Bitcoin's price experienced a significant drop on Sunday after its failure to surpass the $92,000 mark. Coming down to $84,000 by Monday led to the elimination of $388 million in bullish leveraged trades, prompting analysts to seek explanations for the sudden shift. A combination of factors caused this sell-off, prompting traders to adopt a more cautious approach.

The Connection to Japan’s Bond Market

Several market analysts quickly connected Bitcoin's decline to volatility in the Japanese bond market, where yields on 20-year government notes reached their highest levels in 25 years.

Japanese 20-year bond yield vs. Bitcoin/USD
Source: TradingView / Cointelegraph

Increased bond yields generally indicate that investors are reluctant to buy those bonds at current prices, often due to fears of inflation or escalating government debt. Although the bond market fluctuations coincided with Bitcoin’s drop, establishing a direct correlation is difficult; the 30-day correlation has fluctuated between positive and negative throughout the year.

Turbulence in Japan's market may reflect broader weakening expectations about the global economy. Notably, trader Jim Chanos, who famously predicted Enron's collapse during the dot-com era, spoke recently to Yahoo Finance about the rising risks associated with GPU-backed debts from cloud AI companies.

AI datacenter funding
Source: Bofa Global Research

Chanos remarked, “a lot of the AI companies [...] are just loss-making enterprises right now,” and warned, “if this does not change, there is going to be debt defaults.” He noted that the financing method using GPUs as collateral has been led by CoreWeave, coinciding with Nvidia’s substantial investments in the cloud sector.

Growing Regulatory Concerns in the Crypto Market

Another factor contributing to market unease is the regulatory landscape, which, while not directly affecting Bitcoin, has had rippling effects. Increased regulatory scrutiny tends to make investors hesitant to engage with cryptocurrencies, prompting a negative sentiment even without direct ramifications for Bitcoin itself.

On Saturday, Reuters reported that China's central bank reaffirmed its stringent stance on digital assets, committing to a crackdown on illegal activities associated with them. The People’s Bank of China (PBOC) indicated that stablecoins were linked to illicit activities, such as money laundering, fraud, and unauthorized cross-border transfers.

In the past 30 days, Bitcoin’s value has plummeted by 23%, severely impacting strategic digital asset reserve companies. Previously, these firms had significant incentives to issue stocks at market prices and utilize the proceeds to accumulate more Bitcoin. However, this strategy falters when stocks trade below their net asset values.

Phong Le, CEO of Strategy, mentioned in an interview that the company would contemplate selling its Bitcoin only if its market-adjusted net asset value (mNAV) remained depressed and other financing options were unavailable. Despite concerns spreading over the weekend, Strategy successfully raised $1.44 billion on Monday to meet dividend obligations and manage debt.

Tether trading
Source: OKXt

Meanwhile, S&P Global Ratings downgraded Tether's stablecoin reserves to the lowest possible category on Wednesday. Following this downgrading, USDT began trading at a 0.4% discount compared to the official USD/CNY exchange rate in China, indicating moderate selling pressure.

Analysts pointed to “persistent gaps in disclosure” and “limited information regarding the creditworthiness of its custodians, counterparties, or bank account providers” as contributory factors. Regardless of the validity of these concerns, given that Tether doesn’t function like a conventional bank, the downgrade still impacts cryptocurrency traders’ willingness to take risks.

In conclusion, Bitcoin’s fall to $84,000 on Monday illustrates broader anxieties surrounding the stablecoin market and diminishing confidence in global economic prospects, rather than any singular issue within Japan's government bond market.