Written by: David, Deep Tide TechFlow
On December 15, Bitcoin fell from $90,000 to $85,616, with a single-day drop of over 5%.
There were no major explosions or negative events on that day, and on-chain data showed no unusual selling pressure. If you only look at news from the crypto world, it’s hard to find a 'reasonable' explanation.
But on the same day, gold was quoted at $4,323 per ounce, down just $1 from the previous day.
One fell by 5%, the other hardly moved.
If Bitcoin is truly 'digital gold' and a tool for hedging against inflation and currency depreciation, then its performance in the face of risk events should resemble gold more closely. But this time, its movement clearly resembles that of high-beta tech stocks in the Nasdaq.
What is driving this round of decline? The answer may need to be found in Tokyo.
The butterfly effect from Tokyo
On December 19, the Bank of Japan will hold a monetary policy meeting. The market expects it to raise interest rates by 25 basis points, from 0.5% to 0.75%.
0.75% may not sound high, but it is Japan's highest interest rate in nearly 30 years. In prediction markets like Polymarket, traders have priced the probability of this rate hike at 98%.
Why does a decision from a central bank far away in Tokyo cause Bitcoin to drop 5% within 48 hours?
This starts with something called 'yen arbitrage trading.'
The logic is actually quite simple:
Japan's interest rates have long been close to zero or even negative, and borrowing yen is almost free. As a result, global hedge funds, asset management firms, and trading desks have borrowed large amounts of yen, exchanged it for dollars, and then bought higher-yielding assets, including U.S. bonds, U.S. stocks, and cryptocurrencies.
As long as the returns of these assets exceed the cost of borrowing in yen, the interest margin is profit.
This strategy has existed for decades, with a scale difficult to accurately estimate. A conservative estimate is several hundred billion dollars, and some analysts believe that when accounting for derivatives exposure, it could reach several trillion.
At the same time, Japan has a special identity:
It is the largest overseas holder of U.S. Treasury bonds, holding $1.18 trillion in U.S. debt.
This means that changes in the flow of funds in Japan will directly affect the world's most important bond markets, which will in turn transmit to the pricing of all risk assets.
Now, when the Bank of Japan decides to raise interest rates, the underlying logic of this game has been shaken.
Firstly, with the rising cost of borrowing yen, the arbitrage opportunities have narrowed; more troublesome is that the expectation of interest rate hikes will drive up the value of the yen, while these institutions initially borrowed yen and exchanged it for dollars to invest;
Now to repay the money, they need to sell dollar assets to get back yen. The more the yen rises, the more assets they need to sell.
This 'forced selling' does not choose time or variety. Whatever has the best liquidity and is easiest to liquidate is sold first.
Therefore, it's easy to think that Bitcoin's 24-hour trading without limits on price changes, and the relatively shallow market depth compared to stocks, often makes it the first to be hit.
Looking back at the timeline of the Bank of Japan's interest rate hikes over the past few years, this speculation has been somewhat validated by the data:
The last time was on July 31, 2024. After the BOJ announced an interest rate hike to 0.25%, the yen appreciated from 160 to below 140 against the dollar, and BTC dropped from $65,000 to $50,000 within the following week, a decline of about 23%, with the entire crypto market evaporating $60 billion in market value.
According to statistics from multiple on-chain analysts, after the last three interest rate hikes by the Bank of Japan, BTC experienced a pullback of over 20% each time.
The specific start and end points and time windows of these numbers vary, but the direction is highly consistent:
Every time Japan tightens monetary policy, BTC is the hardest hit.
Therefore, the author believes that what happened on December 15 is essentially the market 'running ahead.' Before the decision on the 19th was announced, funds had already started to withdraw in advance.
On that day, the net outflow from U.S. BTC ETFs was $357 million, the largest single-day outflow in the past two weeks; over $600 million in leveraged long positions in the crypto market were liquidated within 24 hours.
These are probably not retail investors panicking but rather a chain reaction of arbitrage trading closures.
Is Bitcoin still digital gold?
The previous text explained the mechanism of yen arbitrage trading, but there is still a question unanswered:
Why is BTC always the first to get hurt and sold?
A common saying is that BTC has 'good liquidity and 24-hour trading,' which is true, but not enough.
The real reason is that BTC has been repriced over the past two years: it is no longer an 'alternative asset' independent of traditional finance, but has been welded into Wall Street's risk exposures.
In January last year, the U.S. SEC approved a spot Bitcoin ETF. This was a milestone the crypto industry had waited ten years for, allowing trillion-dollar asset management giants like BlackRock and Fidelity to compliantly include BTC in their clients' portfolios.
Funds have indeed arrived. But accompanying this is a change in identity: the holders of BTC have changed.
Previously, BTC was bought by crypto-native players, retail investors, and some aggressive family offices.
Currently, the buyers of BTC are pension funds, hedge funds, and asset allocation models. These institutions simultaneously hold U.S. stocks, U.S. bonds, and gold, managing what is called 'risk budget.'
When the overall portfolio needs to reduce risk, they will not only sell BTC or only sell stocks, but will proportionally reduce exposure together.
The data can reveal this binding relationship.
At the beginning of 2025, the rolling 30-day correlation between BTC and the Nasdaq 100 index reached 0.80, the highest level since 2022. In contrast, before 2020, this correlation oscillated between -0.2 and 0.2 for years, essentially considered uncorrelated.
More importantly, this correlation tends to rise significantly during periods of market stress.
In March 2020, the pandemic crash, aggressive rate hikes by the Federal Reserve in 2022, and tariff concerns in early 2025... Each time risk aversion rises, the correlation between BTC and U.S. stocks becomes tighter.
Institutions do not distinguish between 'this is a crypto asset' or 'this is a tech stock' when panicking; they only look at one label: risk exposure.
This raises an awkward question: does the narrative of digital gold still hold?
If you extend the time frame, gold has risen over 60% since 2025, making it the best-performing year since 1979; during the same period, BTC has pulled back over 30% from its peak.
Both are referred to as assets that hedge against inflation and counter currency depreciation, yet in the same macro environment, they have moved along completely opposite curves.
This does not mean that BTC's long-term value is in question; its five-year compound annual growth rate still far exceeds that of the S&P 500 and Nasdaq.
But at this current stage, its short-term pricing logic has changed: it is now a high-volatility, high-beta risk asset, rather than a safe-haven tool.
Understanding this point is key to understanding why a 25 basis point rate hike by the Bank of Japan can cause BTC to drop several thousand dollars within 48 hours.
It's not because Japanese investors are selling BTC, but rather because when global liquidity tightens, institutions will reduce all risk exposures according to the same logic, and BTC happens to be the most volatile and easily liquidated link in this chain.
What will happen on December 19?
When writing this article, there are still two days until the Bank of Japan's monetary policy meeting.
The market has already taken the interest rate hike as a given fact. The yield on Japanese 10-year government bonds has risen to 1.95%, the highest in 18 years. In other words, the bond market has already priced in tightening expectations.
If interest rate hikes have already been fully anticipated, will there still be a shock on the 19th?
Historical experience shows: Yes, but the intensity depends on the wording.
The impact of central bank decisions is never just about the numbers themselves but also about the signals they send. If the Bank of Japan Governor Kazuo Ueda says at the press conference, 'We will evaluate cautiously based on data in the future,' the market will breathe a sigh of relief;
If he says, 'Inflationary pressure persists, further tightening cannot be ruled out,' that could be the starting point for another wave of selling.
Currently, Japan's inflation rate is around 3%, higher than the BOJ's target of 2%. The market is not worried about this particular rate hike, but whether Japan is entering a sustained tightening cycle.
If the answer is affirmative, the disintegration of yen arbitrage trading is not a one-time event but a process lasting several months.
However, some analysts believe this time may be different.
Firstly, speculative funds' positions on the yen have shifted from net short to net long. The sharp drop in July 2024 was partly because the market was caught off guard, as a large amount of capital was still shorting the yen at that time. Now, the position direction has reversed, leaving limited room for unexpected appreciation.
Secondly, Japanese government bond yields have risen for over half a year, from 1.1% at the beginning of the year to nearly 2% now. In some sense, the market has already 'self-hiked,' and the Bank of Japan is merely acknowledging an established fact.
Thirdly, the Federal Reserve just lowered interest rates by 25 basis points, and the global liquidity direction is toward easing. Japan is tightening in reverse, but if dollar liquidity is sufficiently ample, it may partially offset the pressure on the yen.
These factors do not guarantee that BTC won't drop, but they may suggest that this time's decline won't be as extreme as in previous instances.
From the trends observed after previous BOJ interest rate hikes, BTC usually bottoms out within one to two weeks after the decision, entering a consolidation or rebound phase. If this pattern holds, late December to early January could be the most volatile window, but it may also be an opportunity after a mispricing.
Accepted by others, influenced by others
The logic chain in the previous text is actually quite clear:
Bank of Japan interest rate hike → yen arbitrage trading closure → global liquidity tightening → institutions reduce exposure according to risk budgets → BTC, as a high-beta asset, is sold first.
In this chain, BTC has done nothing wrong.
It has just been placed in a position it cannot control, at the end of the global macro liquidity transmission chain.
You may not be able to accept it, but this is the new normal of the ETF era.
Before 2024, BTC's fluctuations were mainly driven by crypto-native factors: halving cycles, on-chain data, exchange dynamics, and regulatory news. At that time, its correlation with U.S. stocks and bonds was very low, and in some sense, it truly resembled an 'independent asset class.'
After 2024, Wall Street is coming.
BTC has been integrated into the same risk management framework as stocks and bonds. Its holder structure has changed, and its pricing logic has changed accordingly.
BTC's market value surged from several hundred billion dollars to 1.7 trillion dollars. But it also brought a side effect: BTC's immunity to macro events has disappeared.
A single statement from the Federal Reserve or a decision from the Bank of Japan can cause it to fluctuate by more than 5% within a few hours.
If you believe in the narrative of 'digital gold,' believing it can provide shelter in chaotic times, then the performance in 2025 may be somewhat disappointing. At least at this stage, the market does not price it as a safe-haven asset.
Perhaps this is just a temporary misalignment. Perhaps institutionalization is still in its early stages, and once the allocation ratios stabilize, BTC will find its rhythm again. Perhaps the next halving cycle will once again prove the dominance of crypto-native factors...
But before that, if you hold BTC, you need to accept one reality:
You are also holding exposure to global liquidity. What happens in a conference room in Tokyo may determine your account balance next week more than any on-chain indicator.
This is the cost of institutionalization. As for whether it is worth it, everyone has their own answer.
