Bitcoin fell more than 6% on Monday, dropping from above $91,000 to around $85,600, amid concerns over the unwinding of the yen carry trade. The Bank of Japan's signal of potential interest rate hikes has pressured traders to sell cryptocurrencies and stocks. Ether also tumbled nearly 9% in the past 24 hours.
The cryptocurrency market experienced a sharp downturn as December trading began, with Bitcoin sliding over 6% in the past 24 hours to roughly $85,600 by Monday afternoon. The drop accelerated late Sunday, with Bitcoin tumbling more than $4,000 in a few hours as Asian markets opened. It dipped below $84,000 Monday morning before recovering slightly, and reached as low as $83,824 in New York according to Bloomberg reports.
This sell-off stems from fears surrounding the yen carry trade, a strategy where investors borrow cheap Japanese yen to invest in higher-yielding assets like cryptocurrencies and US stocks. The Bank of Japan has indicated it may raise interest rates later this month to combat stubborn inflation, a shift from years of ultra-low rates. Yields on benchmark Japanese bonds hit their highest level since 2008, strengthening the yen and making borrowing more expensive. As a result, traders may need to sell Bitcoin and stocks to repay loans, potentially draining liquidity from markets.
"This raises questions about the unwinding of the yen carry trade … which would drain liquidity from the system," said Matt Maley, chief market strategist at Miller Tabak + Co., in a note. "That would not be good for the stock market."
The impact rippled to broader markets: US stocks closed lower, with the Dow falling 427 points or 0.9%, the S&P 500 down 0.53%, and the Nasdaq Composite off 0.38%. Ether, the second-largest cryptocurrency, fell almost 9%, with Bloomberg reporting a drop of up to 10% to $2,719. Almost $1 billion in leveraged crypto positions were liquidated on Monday.
Bitcoin's decline follows a rough November, when it fell to just above $80,000, down 35% from its early October record high above $126,000. The S&P 500 dropped nearly 5% that month but ended slightly up, while the Nasdaq posted its first losing month since March. Year-to-date, Bitcoin is down about 9%, compared to a 16% gain for the S&P 500 and 62% for gold.
"The renewed decline in bitcoin could create some real problems for the stock market," Maley added. "If the issues which are creating this decline do not subside, the year-end rally scenario will run into some real headwinds."
Despite the volatility, the S&P 500 remains less than 2% below its late October record high. Investors have turned to safe havens, with silver hitting a record high on Monday amid uncertainty.