Fun

How the Bank of Japan wrecked the yen carry trade — and crypto markets

News Feed - 2024-08-06 12:08:30

Alex O’Donnell5 hours agoHow the Bank of Japan wrecked the yen carry trade — and crypto marketsWhy did the crypto market lose 15% of its value in one weekend? Thank the Bank of Japan for playing a starring role.3151 Total views29 Total sharesListen to article 0:00OpinionOwn this piece of crypto historyCollect this article as NFTCOINTELEGRAPH IN YOUR SOCIAL FEEDFollow ourSubscribe onCrypto experienced one of its worst days in years on Aug. 5. Few saw it coming, but traders’ addiction to leverage has been quietly amplifying marketwide risks for months. If leveraged trading was the kindling, the Japanese yen’s abrupt uptrend was the match. Thankfully, the fire may burn out as quickly as it started. 


Surging costs on yen-denominated loans caused the crash. Now, markets are set for a healthy rebound as traders finally pare back leverage and exposure to the yen. If broader markets stabilize — and they probably will — crypto may soon make a comeback.Bargain-bin borrowing


It’s no secret crypto doesn’t trade on fundamentals. Prices are mainly driven by short-term institutional traders, who profit off crypto’s volatility. To boost returns, traders double down on positions with leverage, or borrowed funds — often in staggering amounts. Shortly before the crash, open interest, a measure of net borrowing, stood at almost $40 billion.


Related: US Bitcoin, Ethereum ETFs hit $6B volume amid market rout


All that borrowed money has to come from somewhere. Lately, that place has been Japan. In 2022, interest rates on United States Treasury bills rose above zero for the first time in years and kept climbing. In Japan, rates stayed rock-bottom. Trading firms cashed in — taking out huge Japanese loans to cheaply finance trades in other markets.This is excellent. Kyle Bass breaks everything down in 5 minutes.

He thinks switching the Treasury auctions from long duration bonds to t-bills enabled the Treasury to throw another $2 trillion of liquidity into the market.

He then gets into the Yen/carry trade. pic.twitter.com/5qeV7cKKxc— QE Infinity (@StealthQE4) August 5, 2024


It seemed like good timing. By 2023, the crypto’s bull market was in full swing. Leveraged trades — which can amplify gains or losses by 2x or more — paid off handsomely. Meanwhile, traders’ yen-denominated financing was nearly free.


This was the essence of the so-called yen carry trade, and it wasn’t unique to crypto. By 2024, yen-denominated loans to foreign borrowers reached some $2 trillion, up more than 50% from two years prior, according to a report from ING Bank.An end to 17-year-old policy in Japan


Everything changed on July 31, when the Bank of Japan raised rates on short-term government bonds from 0% to 0.25%. (That came after a hike in March, when the bank raised the rate — for the first in 17 years — from -0.1%.) That seemingly innocuous move set off a cascade of events that eventually caused Bitcoin (BTC) and Ethereum (ETH) prices to plunge around 18% and 26%, respectively.


Even traditional markets were badly shaken, with the S&P 500 — an index of US stocks — down more than 5% on the day.


The catalyst wasn’t so much Japan’s rate hike as what followed: the surging value of the yen in foreign exchange markets. (Currencies often gain value when domestic interest rates rise.) From July 31, the USD/JPY exchange rate dropped from around 153 yen per dollar to 145. Suddenly, those yen-denominated loans became significantly more expensive.


Whether because of margin calls from lenders or general caution, traders started dumping positions by the billions. Jump Trading’s sale of more than $370 million in ETH between July 24 and Aug. 4 caused a stir, but they didn’t trigger the downturn. At most, Jump amplified what was already destined to be a historic selloff.Liquidation data for the 24 hours between the evenings of Aug. 4-5, 2024. Source: CoinGlass


In fact, more than $1 billion in leveraged trading positions — representing hundreds of thousands of trades — were liquidated between Aug. 4-5, according to CoinGlass.Coming back stronger?


With some sicknesses, a fever is the cure. Hopefully, that’s what is happening with the markets. Traders were shaken out of high-risk leveraged positions and have finally pared back huge yen-denominated loan obligations. In crypto, net open interest now stands at $27 billion — almost $13 billion less than before the crash.


Related: Forget about Ethereum ETFs — Here"s what you can do instead


Meanwhile, USD/JPY may not have room left to fall, according to ING.


If all else fails, there’s always rate cuts. Japan’s own stock market dropped some 12% on Aug. 5 — its worst one-day drop since 1987. That may force Japan’s central bank to intervene, softening the blow for borrowers. The US may be in for relief too, after a July report showed a sharp rise in unemployment.


In Japan, "If there was a shot at intervention working — this is the time," David Aspell, a senior portfolio manager at Mount Lucas Management, told Cointelegraph. “Given the recent data from the US, it looks like the Fed will be cutting much more aggressively than was thought a few months ago.”


If that scenario plays out, then crypto might be set for a late-summer rebound. Of course, crypto markets are as unpredictable as they come. If there’s one lesson in all this, it’s to think twice before aping into another leveraged trade.Alex O’Donnell is a senior writer for Cointelegraph. He previously founded DeFi developer Umami Labs and worked for seven years as a financial journalist at Reuters, where he covered M&A and IPOs. He is also the crypto growth lead at startup accelerator Expert Dojo.


This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.# Japan# Business# Economics# Economy# Interest Rate# Trading# Ethereum Price# OpinionAdd reaction

News Feed

Memecoins’ mass appeal makes it valuable to DEXs: Kain Warwick
Jesse Coghlan4 hours agoMemecoins’ mass appeal makes it valuable to DEXs: Kain WarwickMemes might be the “most simplistic connection” between financialization, tokenization and culture, says Kain Warwick.3002 Total
French Authorities Raid 5 Major Banks Over Accusations of Money Laundering and Fiscal Fraud
French Authorities Raid 5 Major Banks Over Accusations of Money Laundering and Fiscal Fraud On Tuesday, French officials conducted raids on five major banks located in and around P
Finder’s Panel of Fintech Experts Predict Ethereum Will Reach $5,114 This Year, Over $50K by 2030
Finder"s Panel of Fintech Experts Predict Ethereum Will Reach $5,114 This Year, Over $50K by 2030 At the end of July, the product comparison website Finder.com published its resear
Biggest Movers: SOL up 15%, as Bullish Sentiment Continues to Rise
Biggest Movers: SOL up 15%, as Bullish Sentiment Continues to Rise Solana extended recent gains on Wednesday, as the token rose by as much as 15% in today’s session. The mov
Savannah Fortis9 hours agoThe UN holds a robot press conference about the state of AIThe AI for Good global summit hosted by the U.N. tech agency invited a panel of robots and their creators to a press conference to answ
FBI Warns Ransomware Gangs Are Harassing Victims via Telephone Calls to Pay Crypto Ransoms
FBI Warns Ransomware Gangs Are Harassing Victims via Telephone Calls to Pay Crypto Ransoms The U.S. Federal Bureau of Investigation (FBI) has released an alert t
Binance denies reports of DWF Labs market manipulation
Zoltan Vardai13 hours agoBinance denies reports of DWF Labs market manipulationDWF Labs was first hit by market manipulation accusations in September 2023.2211 Total views10 Total sharesListen to article 0:00NewsOwn this
Bullish Bitcoin traders better positioned for Friday’s $5.5B options expiry
Marcel Pechman4 hours agoBullish Bitcoin traders better positioned for Friday’s $5.5B options expiryBullish Bitcoin options traders expect a hefty profit from Friday’s expiry now that Germany and Mt. Gox wallets have
Token Projects to Recover $130M from the Kucoin Hack, Devs Condemned for Centralization
Token Projects to Recover $130M from the Kucoin Hack, Devs Condemned for CentralizationThe cryptocurrency community has been discussing the Kucoin hack as a great number of ERC20 pr
BRICS Nations ‘Coalescing Against the Dollar,’ Major Banks Predict More Fed Hikes, Bitcoin Records Large Blocks as Ordinals Gain Currency
BRICS Nations "Coalescing Against the Dollar," Major Banks Predict More Fed Hikes, Bitcoin Records Large Blocks as Ordinals Gain Currency In spite of turbulence in traditional glob
Shiba Inu Braces For Rally – Analyst Sees 35% Price Surge – Details
Este artículo también está disponible en español. This past few days has been quite the week for Shiba Inu, the second-largest meme coin by market valuation. The token sa
Price analysis 7/5: BTC, ETH, BNB, SOL, XRP, DOGE, TON, ADA, AVAX, SHIB
Rakesh Upadhyay6 hours agoPrice analysis 7/5: BTC, ETH, BNB, SOL, XRP, DOGE, TON, ADA, AVAX, SHIBThe strong bounce in Bitcoin and select altcoins shows solid demand at lower levels, suggesting traders are buying the curr