Bitcoin’s Impending ‘Death Cross’ May Trap Bears as Bank of Japan Eases Rate Concerns

On Wednesday, Governor Shinichi Uchida of the Bank of Japan (BOJ) stated that they wouldn’t increase borrowing costs when markets are volatile. This declaration weakens the argument for further liquidation of “yen carry trades,” leading to caution in risk assets such as bitcoin, due to potential instability in these investments.

In my analysis, given the significant fluctuations currently observed in both local and global financial markets, it seems prudent to continue our existing policy of monetary accommodation for now. This was expressed during a recent address I gave to business leaders in Hakodate, Hokkaido.

In simpler terms, despite the impending ‘death cross’ event where a cryptocurrency’s short-term moving average falls below its long-term average, the Bank of Japan’s recent comments suggest that there may not be much room for the cryptocurrency to decrease in value.

Bitcoin strengthened after remarks by Uchida, peaking at $57,300, due to a weakened Japanese yen (JPY) that dropped to 148 JPY per USD from 145 JPY per USD. This movement suggested a shift in risk, as the Nikkei equity index climbed by 4%, and S&P 500 futures increased by 0.8%.

As a researcher, I noted that the Bank of Japan (BOJ) implemented the ‘Yen put’ strategy. This move could potentially guide the Nikkei index towards reclaiming its positions prior to the selloff, which in turn might influence both the Nasdaq and S&P 500 indices to return to their pre-selloff levels.

“The yen carry trade is a financial strategy where one borrows yen at low interest rates and uses those funds to buy high-yield currencies such as the Mexican peso or risky assets. This approach has gained traction recently because the Bank of Japan has maintained ultra-low interest rates, while other central banks like the Fed have been increasing lending rates quickly to combat inflation.”

On last Wednesday, the Japanese central bank decided to increase interest rates, marking a departure from their 17-year long easy monetary policy. This shift, known as a hawkish move, led to the unwinding of carry trades and created a widespread sense of caution or risk aversion. As a result, Bitcoin dropped significantly, plummeting from $66,000 to around $50,000 within five days, up until Monday.

According to Andy Constan, CEO of Damped Spring Advisors, by July 16th, equity markets and other high-risk asset markets reached their peak. After this, for reasons unknown, these asset markets started to decline. As the selling persisted, those who had recently invested in the Yen carry trade saw their assets dropping significantly, which is typically what triggers unwinding. However, things took a turn for the worse when the yen itself began to appreciate gradually, marking the beginning of an unwind.

“As unwinding of trades occurs, there is a shift towards purchasing Yen and selling high-risk assets, causing inflexible price movements. The sale of these risky assets also affects a vast number of highly leveraged investors who have no Yen exposure at all. As a result, they receive margin calls.” (Constan noted)