Bitcoin Faces Pressure as Yen Carry Trade Unwind Affects Global Markets

Recent market turbulence has been sparked by the unwinding of the yen carry trade, which Graham Stephan describes as a crucial factor influencing Bitcoin and other cryptocurrencies. As global liquidity tightens, the implications for risk assets like Bitcoin become significant.

Key Takeaways

The yen carry trade, a long-standing financial strategy, is undergoing an unwind, affecting market liquidity.
Investors typically profit from this trading style by borrowing at low interest rates in Japan and investing in higher-yield assets in the U.S.
As Japan raises interest rates, investors may be forced to sell U.S. assets to repay yen loans, leading to liquidity challenges.
Bitcoin's price could be impacted due to its sensitivity to market shifts, with potential volatility ahead.

Bitcoin news Yen Carry trade

Understanding the Yen Carry Trade's Impact on Bitcoin

The recent unwinding of the yen carry trade has created ripples across global financial markets. This financial phenomenon, often overlooked until market volatility spikes, has come into focus thanks to insights from popular YouTuber Graham Stephan.

In a December 15 post, Stephan portrayed the yen carry trade as akin to Wall Street's "infinite money glitch," emphasizing that its breakdown corresponds with the Federal Reserve's changing monetary policy outlook for the coming year. He stated, "Wall Street found an ‘infinite money’ glitch 20 years ago. They called it the Yen Carry Trade. It just broke, right when the Fed announced its plans for next year."

What the Yen Carry Trade Situation Means for Bitcoin

Stephan simplified the yen carry trade, explaining its mechanics in a way that's easy to grasp. He described it as a lucrative trade that thrived due to its scale. For decades, this trade has acted as a booster for global liquidity. "Borrow Cheap: Investors borrowed money in Japan, where interest rates were effectively 0%… Invest Abroad: They took that ‘free money’ and bought U.S. Treasuries paying 4-5%… Profit: They pocketed the difference without using any of their own money."

However, Stephan warns that this setup becomes problematic when the interest rate gap narrows and the currency dynamics shift. He suggests a precarious timing for risk assets, with Japan tightening its monetary policy to strengthen the yen while the Fed is easing. He explains, "Japan is finally raising rates to save its own currency right at the time the Fed has started slashing rates. The gap between the rates is getting squeezed. The ‘free money’ isn’t free anymore."

As funding costs rise and currencies fluctuate, leveraged positions must adjust quickly. "As Japanese rates rise, that trade flips. Investors are now being forced to sell their U.S. assets to pay back their yen loans. Instead of money flowing into the U.S. markets, it is being sucked out to pay debts in Tokyo. This is a massive liquidity drain happening right under our noses."

This background leads Stephan to his perspective on Bitcoin. Instead of declaring Bitcoin as "broken," he suggests that Bitcoin's price reflects early shifts in risk appetite and leverage. Forced selling can be severe under these circumstances.

In a subsequent Substack post, Stephan connected the dots between the Fed's actions and the challenges ahead, urging readers to prepare for volatility. He indicated that the Fed had cut rates for the third time this year and had ended its period of "Quantitative Tightening," hinting at a return to expansive monetary policy. "Finally, the most important news of the day: Quantitative Tightening (QT) is over… They even announced they will buy $40 billion of Treasuries over the next 30 days. The tightening era is dead. The ‘stimulus’ era is now being rebooted, and the money printer is being turned on."

Combining these insights, Stephan presents Bitcoin as being caught between two opposing forces: the rapid unwinding of the carry trade and the slow easing of monetary policy. One could lead to quick and stark price movements, while the other unfolds gradually.

He concluded on a familiar note about Bitcoin's volatility, reminding readers that significant declines are not uncommon. "Bitcoin isn’t broken. It’s just volatile, and this isn’t the first time this is happening. Statistically, Bitcoin has seen drastic crashes of 50% or more, but it has never dropped below its 'electrical cost' (the cost to mine one coin), which sits around $71,000 today. If we get close to that number, history suggests it’s a strong buy zone," he highlighted.

At the time of publication, Bitcoin was trading at $87,082.

Bitcoin price Bitcoin's current price movements illustrate its position in the market.