Don’t underestimate the moves of the Bank of Japan—every time they adjust interest rates, the crypto market shudders three times over. On the surface, this looks like Japan’s own monetary policy, but in reality, it directly cuts off a major funding channel for the crypto world. In the short term, you’ll see cycles of liquidity drying up, leveraged liquidations, and market panic; but over a longer time frame, this actually creates a window for low-level positioning—provided you can accurately gauge the policy rhythm and pick the right assets.

Here’s the bottom line: Japan’s interest rates have been on the floor, near zero. So global capital has been frantically borrowing cheap yen, converting it to dollars, and then pouring into crypto assets like Bitcoin and Ethereum, further amplifying returns with high leverage and DeFi protocols. This strategy has supported a yen carry trade of $4–5 trillion, accounting for 20–30% of new funds in the crypto space—a true lifeline for liquidity.

But once Japan raises interest rates, this whole chain breaks. First, borrowing costs soar, and the interest on large loans can wipe out any gains. Second, the yen starts to appreciate, so when it’s time to pay back, more dollars are needed for conversion—investors have no choice but to quickly sell off crypto assets, swap them for dollars, and pay back yen. As capital exits on a large scale, crypto prices inevitably can’t hold up. When they hiked rates by 25 basis points in August 2024, Bitcoin plunged from $65,000 all the way down to $49,000; by December 2025, just the expectation of a rate hike caused Bitcoin to drop $3,000 and Ethereum 5%.

Even worse is the leverage problem. Tons of players in crypto are running 50x or 100x leverage contracts, and the price swings and exchange rate changes triggered by rate hikes can easily trip liquidation lines. Once liquidations start, it’s a chain reaction—the more forced selling, the lower the prices, which in turn triggers even more liquidations. It’s a vicious cycle. Single-day liquidations in the billions of dollars aren’t unusual; that 2024 rate hike caused Bitcoin to crash over 24% in a single month. Remember, Japan is the last major economy to exit ultra-loose monetary policy.