The price of cryptocurrencies crashed hard on Monday, with major players like Bitcoin and Ethereum falling by almost 10%. The Bank of Japan’s decision to hike interest rates hurt carry bets on riskier assets like cryptocurrencies, which is what precipitated the collapse.
Carry trading is a strategy used by traders to borrow money from countries with low interest rates, such as Japan, and invest the money in assets with greater yields. For an extended period, the Japanese yen has been a preferred carry trade currency due to its negative interest rates.
Interest rate increases cause the currency to appreciate, which causes some “carry trade unwinding”—traders selling off a portion of their assets to protect against currency appreciation.
For the first time in seventeen years, the Bank of Japan increased interest rates in 2024. The Bank of Japan announced two rate increases in July: the first in March and the second on July 31 when interest rates were lifted to 0.25%.
The Bank of Japan made the decision to maintain the weak yen and bring back monetary stability. In addition to making borrowing more expensive, higher interest rates will have an impact on carry trades.
Increased fears about a US recession and rising global tensions have made the sell-off in cryptocurrency markets worse. Consequently, rising interest rates and the value of the yen had an impact on the Bitcoin market.
At $52,393, bitcoin was trading down about 13%. The currency has fallen to a low of $49,314 in the past day. The price of bitcoin is at its lowest point in more than five months right now. At $2,340, Ethereum was under pressure, having dropped 13%. The price of cryptocurrencies dropped to $2,112, its lowest point in around six months, although it later rose again. Other cryptocurrencies, which saw heavy selling pressure on Monday and had increases of over 10%, include Ripple, Binance Coin, and Solana.
On Monday, cryptocurrencies such as Ethereum and Bitcoin saw a 12% decline. The decision by the Bank of Japan to hike interest rates led to a widespread sell-off in the market for cryptocurrencies. Carry transactions became more costly for dealers as the yen appreciated. Moreover, concerns about the recession and international tensions intensified the unfavourable environment.
