The recent turmoil in the cryptocurrency market was largely triggered by events in Japan, according to new analysis from Kaiko, a leading cryptocurrency data provider.
According to the report, the Bank of Japan's (BoJ) unexpected interest rate hike at the end of July caused a chain reaction in global financial markets, and as investor confidence waned, stocks and cryptocurrencies also fell.
The first weekend of August saw a sudden and sharp drop in cryptocurrency prices. Bitcoin (BTC) fell over 12% over the weekend, falling below $50,000 on European markets on Monday morning. The sell-off was accompanied by a surge in trading volumes on Japanese cryptocurrency exchanges, with Bitbank and Bitflyer recording their highest activity since March, when Bitcoin reached record highs.
Japanese markets have seen a significant increase in BTC-JPY trading, while trading activity for Ethereum (ETH) and Ripple (XRP) against the Yen has also increased. Interestingly, ETH-JPY trading briefly dominated trading volumes on Saturday evening, accounting for over 30% of market activity. This increase came just before the broader wave of market volatility and coincided with news that Jump Trading was dumping its Ethereum holdings, fueling concerns among investors.
Kaiko’s analysis shows that the preemptive moves in Japanese markets ahead of the US and other regions were largely due to the unwinding of the yen carry trade. This strategy involves borrowing yen at low interest rates to invest in higher-yielding assets such as US Treasuries. Japanese investors’ significant holdings of US Treasuries make them vulnerable to both the yen and US bond markets. The profitability of the carry trade has diminished as the BOJ has raised interest rates and expectations of a Fed rate cut have increased.
Carry trades thrive in stable market conditions, but the BOJ’s second rate hike since 2007 disrupted that stability. As the trade lost its appeal, investors rushed to reduce their exposure, leading to widespread market volatility and significant sell-offs in both traditional and crypto markets.
*This is not investment advice.
