Bitcoin Exchange CEO Arthur Hayes Raises Concerns Over Strength of Japanese Yen
Experts have highlighted the potential risk for Bitcoin [BTC] amid the ongoing unwind of Japanese carry trades. The primary cryptocurrency witnessed a temporary surge to $58K earlier this week, only to retrace some gains following the conclusion of the Trump-Harris US presidential debate.
Aside from the US elections, the continuous unraveling of carry trades, which led to the significant drop to $49K in early August, could have an impact on BTC. The sell-off was directly connected to the strengthening of the Japanese Yen in comparison to the US dollar.
Could the unwind of carry trades affect Bitcoin?
A similar pattern has caught the attention of BitMEX founder Arthur Hayes, prompting him to issue a cautionary statement on the risk involved. Hayes mentioned,
“With $USDJPY showing signs of weakness, we may see turbulence in the market once again as it approaches 140. Let’s observe how $BTC manages to stay resilient.”
To provide context, investors engage in carry trades by borrowing from low or nearly zero-interest currencies to invest in assets with higher returns. For almost 17 years, the Yen has been among the most cost-effective currencies (with nearly zero interest rates), attracting carry trade participants looking to capitalize on better returns in the US markets.
This scenario shifted when the Bank of Japan decided to raise interest rates in August, triggering the unwind of carry trades (closure of positions) and a subsequent sell-off that also impacted the cryptocurrency markets.
According to Yardeni Research, the unwinding of carry trades might persist, particularly in anticipation of a 50 bps (basis points) reduction in the Federal Reserve’s interest rates and an increase in liquidity next week. A section of Yardeni’s recent analysis stated,
“Anticipated adjustments in interest rates by the Federal Reserve, alongside the Bank of Japan’s counteractive moves, are bolstering the Yen and compelling traders to unwind their carry trades.”
Given Bitcoin’s strong positive correlation with the Nasdaq rather than gold, the impact of the carry trade unwind on Bitcoin may be more pronounced. In essence, Bitcoin may not be immune to another market downturn.
Concurrently, investors in US Bitcoin ETFs have embraced a risk-on strategy that aligns with the recent recovery in Bitcoin prices. These financial products have witnessed net inflows over the last couple of days, breaking a prolonged streak that saw outflows exceeding $1.2 billion.
It remains to be seen whether investors will uphold their confidence amidst the risks posed by the unwinding of carry trades.