Concerns about a Potential Repeat of July 2024's Bitcoin Crash

As we approach the Federal Open Market Committee (FOMC) meeting on December 9-10, Bitcoin finds itself in a precarious position due to potential yen carry-trade shocks. Market participants are particularly wary due to the anticipated hawkish stance from the Bank of Japan (BoJ) during its meeting on December 18-19. This scenario mirrors the events of last summer when a policy shift in Tokyo triggered significant upheaval in risk assets, including cryptocurrencies.

Key Takeaways

Bitcoin is facing potential risks tied to a yen carry-trade shock as the FOMC meeting approaches.
Analyst Benjamin Cowen draws parallels between current conditions and the market's reaction in July 2024.
Large institutions using yen to invest in U.S. assets could trigger significant sell-offs in Bitcoin if conditions change.
Upcoming meetings from the Fed and the BoJ are critical for market sentiment, with expectations for possible rate changes influencing investor behavior.

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Is Bitcoin Headed for a Crash Next Week?

Analyst Benjamin Cowen draws a direct connection between current market conditions and the sudden shock experienced in July 2024. He points out that during that month, the Federal Reserve reduced interest rates while the BoJ opted to raise rates. This created pressure on Bitcoin, which experienced a significant decline but ultimately found its low just one week later. Cowen suggests that a similar event might take place on December 10, with the Fed cutting rates and the BoJ raising them. His prediction indicates that Bitcoin might find another low around mid-December.

The market dynamics from last year tell a more complex story. As the Fed signaled easing, the BoJ surprised many with its rate hike. However, Cowen emphasizes a critical aspect of the situation: when U.S. monetary policy shifts toward looser conditions while Japan tightens, the longstanding yen carry trade becomes unstable, leading to substantial sell-offs in high-risk assets.

Truflation's analysis highlights the implications for Bitcoin and the larger cryptocurrency market. Large institutions and commercial banks often borrow yen, where interest rates are historically low, to invest in the U.S. These institutions can earn a respectable 3-4% on the interest spread or invest in higher-return assets like stocks and bonds, benefitting from a weak yen against the dollar due to BoJ policies.

However, trouble arises when stock valuations decline, or the yen is projected to strengthen. At that point, institutional borrowers are likely to exit their positions to avoid significant losses tied to their yen-denominated debts. This leads to asset sales in the U.S. to cover these obligations, prompting a wave of U.S. asset sales and yen purchases. What was once viewed as a relatively safe strategy for large banks and investors becomes riskier, resulting in a broad-scale pullback. Bitcoin, as a liquid and leveraged risk asset, gets caught in the crossfire.

Crypto trader Kevin (@Kev_Capital_TA) emphasizes how critical the upcoming timeframe is. He notes that various inflation indicators and the FOMC meeting are scheduled within the next six days, followed by a pivotal BoJ press conference on December 19. According to him, this event will be crucial for the U.S. dollar, along with the short and long ends of the yield curve, as well as concerns surrounding the yen carry trade. Kevin additionally points out that Japanese yields are climbing, exerting increasing pressure on the BoJ to respond.

Recently, BitMEX founder Arthur Hayes directly linked the broader market recalibration to Bitcoin's latest downward movement. He attributed the price drop to the BoJ's potential December rate hike, viewing the sell-off as a funding shock rather than a problem specific to cryptocurrency.

As we head into December, futures markets and economist surveys place the odds of a Fed rate cut at around 80-87% for the December 9-10 meeting, despite some divisions within the committee. Simultaneously, the BoJ is signaling its intention to weigh the pros and cons of a potential rate hike during its December 18-19 meeting, with the markets now predicting a high likelihood of tighter monetary policies and 10-year Japanese Government Bond (JGB) yields approaching multi-decade highs.

This combination—expectations of Fed easing alongside BoJ tightening—creates the conditions that threaten the yen carry trade and raises the possibility of a repeat of the July 2024 scenario: a sharp decline in Bitcoin and other risk assets, followed by a bottoming out once forced sell-offs have run their course.

At the time of writing, Bitcoin is trading at $92,235.

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