Japan's interest rate hike may seem like a domestic monetary policy adjustment, but it will strongly impact the global crypto market. The core issue is that the yen carry trade, which supports crypto market capital, is directly disrupted. In the short term, the market will first suffer from a triple blow: liquidity crunch, leveraged liquidations, and panic sentiment. In the long term, however, this creates an opportunity for low-entry positioning, with the key depending on the pace of policy and asset selection.

Simply put, Japan's interest rates were previously near zero, so international capital has been borrowing cheap yen, converting it to US dollars to invest in cryptocurrencies like Bitcoin and Ethereum, and earning high returns through high leverage and DeFi. This yen carry trade amounts to $4-5 trillion, accounting for 20%-30% of new funds in the crypto market, and is a key source of liquidity. However, once Japan raises rates, this strategy no longer works: First, borrowing costs rise, with large loan interest rates increasing sharply, eating up all profits. Second, the yen appreciates, making it more expensive to repay yen-denominated debts with US dollars. Investors are forced to quickly sell crypto assets, exchange for US dollars, and convert to yen to repay debts, causing massive capital outflows from the crypto market. In August 2024, when rates increased by 25 basis points, Bitcoin fell from $65,000 to $49,000. In December 2025, even just the expectation of a rate hike caused Bitcoin to drop $3,000 and Ethereum to fall 5%. That's the logic.

Moreover, many people in the crypto market use 50x or 100x leverage. Rate hikes cause price drops and exchange rate changes, easily triggering forced liquidations. The more liquidations, the further prices fall, creating a vicious cycle. It's common to see over a billion dollars in liquidations in a single day. In 2024, that rate hike caused Bitcoin to drop more than 24% in a single month. At the same time, Japan is the last major central bank to exit easy policy. Its rate hike will be seen as a signal of global tightening, prompting institutions to reduce positions, retail investors to panic sell, and with occasional industry issues like hacks or exchange problems, panic spreads even more and the downturn worsens.

What's more complicated is that global central banks now have differing policies: the market speculates the US Fed may cut rates in December, while Japan hikes rates. This divergence makes exchange rate fluctuations bigger, carry trades less attractive, and capital more eager to exit crypto. If this coincides with a major Bitcoin options expiry, the market becomes even more fragile.

But there's no need to panic. The crypto decline caused by Japan's rate hike is mainly a short-term liquidity issue, not a problem with the industry itself. Historically, after such drops, markets often rebound. After the sharp drop in 2024, Bitcoin rose 20% within three weeks and later surpassed previous highs. In the long run, after the yen appreciates, Japanese domestic investors can buy USD-denominated crypto assets more cheaply. Combined with Japan's more favorable Web3 regulations and tax policies, domestic compliant capital will gradually flow in, filling the gap left by departing carry trade funds.

For investors, the key is risk control and focusing on core assets: keep 30%-50% of your portfolio in stablecoins, avoid high leverage; major assets like Bitcoin and Ethereum may fall in the short term, but their medium- and long-term risk-hedging value remains—don't blindly sell at the bottom; also, keep a close eye on the Bank of Japan's rate meeting on December 19 to see if and how much rates are raised—this will determine market direction afterward. Overall, Japan's rate hike squeezes out speculative capital from the crypto market, causing short-term volatility but creating low-entry opportunities for long-term investors. The gap caused by the drop will eventually be filled by new capital.