The world's largest arbitrage business is collapsing, and this is the truth behind the market big dump?

Today, BTC once reached 85,600 USD, with 200,000 people in the entire network being liquidated.

Everyone is asking: Why is it another rate hike for the yen?

The answer lies in a global arbitrage trade with a scale of up to 20 trillion dollars.

01｜What happened in the market on December 1?

Today in the Asian early session, the crypto market suffered a heavy setback.

Bitcoin has fallen from $95,000 to $85,600, a drop of more than 5%.

Ethereum, SOL and other mainstream coins are experiencing a big dump.

The total liquidation amount across the network has surged, with over 200,000 investors exiting during this bloodbath.

At the same time, the traditional market has not been spared:

The Nikkei 225 index temporarily fell below 50,000 points during the session, down 1.5%.

The Japanese yen rose 0.4% against the US dollar in the short term, reaching 155.49.

Japan's 2-year government bond yield surpasses 1%, reaching its highest level since 2008.

The catalyst for all of this came from one person's speech.

The Governor of the Bank of Japan, Kazuo Ueda, stated in a speech to business leaders:

"The central bank will assess the pros and cons of adjusting the policy interest rate and make decisions in a timely manner based on economic conditions, inflation, and financial market situations."

This statement is seen by the market as the clearest hint of interest rate hikes so far.

The probability of traders expecting the Bank of Japan to announce an interest rate hike at the meeting on December 19 surged to 76%.

Arthur Hayes subsequently tweeted to clarify:

"Today, Bitcoin experienced a big dump, which is due to the possibility of the Bank of Japan raising interest rates."

But the question arises - what makes Japan's interest rate policy capable of shaking the global market?

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02｜What is Yen Arbitrage Trading? The World's Largest Arbitrage Business

To understand today's big dump, one must first understand the largest arbitrage trade in the world, which has lasted for 30 years and amounts to 20 trillion dollars.

Its name is: Yen Carry Trade.

The logic of arbitrage is very simple:
-Borrow yen in Japan at an interest rate close to 0%
- exchange yen for dollars
- Invest in high-yield assets such as US stocks, US bonds, and cryptocurrencies.
-The interest spread is profit.

Japan has long maintained close to 0% or negative interest rates, making the yen the cheapest financing currency in the world.

Global hedge funds, investment banks, pension funds, and even retail investors are frantically borrowing yen to invest overseas.

How exaggerated is the scale?

The global liquidity related to financing in Japanese yen: 200 trillion.

This number means:

- equivalent to 5 times Japan's GDP
-Equivalent to 18% of global GDP
-Equivalent to one-third of the market value of the US stock market.

In my opinion, this is more like an invisible leverage of the global financial system.

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03｜Why will the yen interest rate hike trigger a global big dump?

Because the interest rate hike in yen will trigger a triple kill.

First layer of killing: Rising borrowing costs

In the past, the cost of borrowing in yen was 0%, but after the interest rate hike, it may rise to 0.5% or even higher. The interest rate spread has been compressed, and the attractiveness of Arbitrage has decreased.

Second strike: Yen appreciation (deadly move)

Assuming you borrowed 100 million yen (approximately 667,000 USD) at an exchange rate of 150 to invest in BTC.
The Japanese yen has appreciated to 145, and you need to spend 689,000 USD to repay 100 million yen.
Due to exchange rate fluctuations, an additional 22,000 USD was paid.

If it rises to 140, 135, 130... the losses will multiply.

Third heavy kill: forced liquidation

Rising borrowing costs + yen appreciation will force arbitrage traders to sell risk assets to repay loans in yen.

And with an arbitrage scale of 20 trillion dollars, just a 10% liquidation would mean a big dump of 2 trillion dollars.

Where does the sell-off come from?
-US stocks
-US Treasury Bonds
-Emerging Markets
-Cryptocurrency

Therefore, BTC and ETH will be indiscriminately sold off.

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04｜History does not repeat itself, but it always rhymes: The bloody warning on August 5

This is not the first time.

What happened on August 5, 2024?

Due to Japan's unexpected interest rate hike to 0.25%, the global big dump:
-Nikkei 225 big dump 12.4%
-BTC fell from 60,000 to 49,000, a fall of 18%
-Nasdaq plummeted 3.43%
-The BIS report shows that BTC and ETH have losses of up to 20%, triggering global margin calls.

The market took a full 3 weeks to recover.

Although the market had an expectation in advance (76%).
But if the interest rate really increases on December 19, the remaining Arbitrage will continue to close.

There may even be a second big dump due to "good news being fully priced in."

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05｜What will happen on December 19? Three scenario simulations

There are 18 days left until the meeting, and three directions can be projected.

Scenario A | Interest rate hike as scheduled (Probability 76%)
The interest rate has been raised from 0.25% to 0.5%.

Short term:
BTC may test 80,000-85,000
The yen rises to 150-152
Arbitrage continues to close positions

Mid-term:
Arbitrage scale dropped from 20 trillion to 15 trillion
Global liquidity tightening

Strategy:
Leverage reduced to 2-3 times
Set the stop-loss at 80,000
At least keep 30% cash
Diversify your investments, don't go ALL IN

Scenario B | No interest rate hike (Probability 24%)

Short-term:
BTC rebounds to 95,000-100,000
The yen may depreciate to 160
Arbitrage trading short-term recovery

Medium-term:
There will be greater pressure for interest rate hikes in the future.
The risk is postponed, not eliminated.

Strategy:
Do not chase the high
reduce positions at highs
Beware of the "delayed interest rate hike" backlash

Scenario C | Interest Rate Hike and Dovish Signals

Short-term fluctuations, BTC repeatedly within the range of 85,000 to 92,000.

Strategy:
Build positions in batches
Pay attention to the Federal Reserve's dynamics.
Do not chase highs and kill lows

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06 | Three Tips for Traders

We cannot change the macro environment, but we can control risks.

Suggestion 1: Be cautious of the fluctuations around December 19.

Key Time:
December 17-18: Federal Reserve Meeting
December 19: Bank of Japan meeting

Strategy:
Reduce leverage before December 15
Reduce operations around the 19th.
Adjust based on the results after the 20th.

Suggestion 2: Keep a close eye on the yen exchange rate

This is a leading indicator for Arbitrage closing.

Key Threshold:
Yen falls below 150 (appreciation): Beware of selling
Yen returns to 160 (devaluation): pressure eases

Suggestion three: Do not confront macro trends.

Yen arbitrage is a $20 trillion giant.
Individuals cannot withstand this level of liquidity shock.

Core Strategy: Prioritize capital preservation; build positions in batches; set stop-loss; do not attempt to catch the lowest point.

Historical lessons:

On August 5, those who bought BTC at 60,000 were all lifted to the day's lowest of 49,000.

The real bottom often appears in the 3rd to 4th week after the panic.

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Written at the end

The big dump on December 1st was not due to a problem with Bitcoin, but rather a problem with global liquidity.

The 30-year yen Arbitrage trade, a $20 trillion Arbitrage machine, is experiencing a reversal.

Every time Japan raises interest rates, it triggers a wave of liquidations from this machine. As a high-risk asset, crypto is always among the first to be sold off.

August 5th in history is a warning, and December 19th in the future may be a verification.

Remember the core phrase: In the face of macro currents, surviving is more important than making money.

Reduce leverage. Keep cash. Set stop-loss. Do not go against the trend.

The market will always give a second chance to those who are prepared, but it will not give a second life to those who are liquidated.

We are looking forward to December 19.