Why does the crypto world suffer when the yen interest rate rises?

The answer is hidden in a financial game that has been played for several years.

In recent years, Japan's money has become ridiculously cheap—approaching zero interest rates. Institutions and large funds seized this opportunity: first borrowing a sum of almost interest-free yen, converting it into dollars, and then diving into the crypto market. Bitcoin, Ethereum, various tokens, all leveraged and heavily traded.

This set of operations has a professional name: yen arbitrage trading. How exaggerated is the scale? Two to three tenths of the funds flowing into the crypto market come from this route.

In other words, this round of bull market is fed by the low interest policy of the Bank of Japan for at least half.

What now? Japan is going to raise interest rates.
The cost of borrowing yen has suddenly increased, and the cheap money that was once free is now expensive. Who would still continue playing this game? The most rational choice is, of course, to quickly sell the coins and exchange them back for dollars and yen.

With tens of trillions of dollars in funds collectively withdrawing, how can the market not collapse?

This is not the first time this has happened. Last August, the Bank of Japan executed a surprise interest rate hike, causing Bitcoin to plummet from $65,000 to $49,000, leading to a $3 trillion evaporation in the global capital markets. This time, it is likely to be even more severe.

For us ordinary people, this wave of decline feels like three knives cutting in at the same time:

**First Cut: Liquidity Extraction.**
A large chunk of money suddenly disappeared from the market, and with fewer buyers, the prices naturally couldn't hold up.

**Second Cut: Leverage Liquidation Wave.**
A bunch of people in the crypto world are using 50x and 100x leverage. When it drops a few points and the margin is insufficient, the system directly liquidates. One after another, they blow up, and the ripple effect is more severe than you can imagine.

**Third Cut: Emotional Crash.**
The big players have left, the retail investors are in a panic, and the media is starting to call it a bear market, with more people cutting their losses and leaving the market. The snowball is getting bigger and bigger, and no one can stop it.

Why is it especially dangerous this time?

Because several things came together:
- The Federal Reserve may need to cut interest rates, while Japan is raising them. The flow of capital is completely torn apart, and arbitrage trading fears this kind of reverse operation.
- The leverage ratio in the entire crypto world is even higher than last year. A slight fluctuation can trigger a chain liquidation.
- There will be a large batch of options expiring in mid-December, and the selling pressure will only increase then.

However, history also tells us one thing: after a collapse, it is often a golden pit.

In last August's crash, Bitcoin rebounded by 20% three weeks later. Each time a crash caused by the withdrawal of arbitrage funds occurs, it is followed by an opportunity for large funds to buy at the bottom.

So what should ordinary people do?

Several suggestions:
- Keep some stablecoins on hand, don't go all in. Cash is always the best safety cushion.
- If you have mainstream coins like Bitcoin and Ethereum, hold on tight. Don't sell at a low price to institutions out of panic.
- Keep an eye on the Bank of Japan meeting from December 18 to 19. Before that, try to reduce leverage, especially the positions in altcoins.

When the market is in panic, what retail investors should do is not to follow the panic, but to patiently wait for opportunities, and to act decisively and accurately when the time comes.