Experts highlight potential risks for Bitcoin (BTC) amidst the ongoing unwinding of Japanese-linked carry trades. The primary cryptocurrency witnessed a surge to $58K earlier this week followed by a partial retracement after the Trump-Harris US presidential debate.
Aside from the US elections, the continued unwind of carry trades, which led to the sharp decline to $49K in early August, poses a threat to BTC. The selloff was attributed to the appreciation of the Japanese Yen against the US dollar.
Could carry trade unwind impact BTC?
A similar pattern has raised concerns, prompting Arthur Hayes, the founder of BitMEX, to issue a risk advisory. In his words,
“$USDJPY breaking support, signaling potential turmoil across markets as it nears 140. Let’s observe Bitcoin’s response.”
To provide context, investors engage in carry trades by borrowing funds from low or zero-interest-rate currencies to invest in higher-yielding assets. The Yen, with almost negligible interest rates for around 17 years, has been a popular choice, attracting investors pursuing higher returns in US markets.
However, the scenario shifted when the Bank of Japan (BoJ) raised interest rates in August, triggering the unwinding of carry trades and subsequent selloffs that impacted the crypto markets as well.
Yardeni Research anticipates that the carry trade unwinding could persist, particularly amid expectations of a 50 basis points (bps) rate cut by the Federal Reserve next week alongside liquidity injections. A section of Yardeni’s recent analysis mentioned,
“Anticipation of a rate cut by the Federal Reserve while the Bank of Japan raises rates is strengthening the Yen and compelling traders to close out carry trades.”
Given Bitcoin’s strong positive correlation with the Nasdaq rather than gold, the impact of the carry trade unwinding on BTC could be substantial. In essence, BTC might not be immune to another market downturn.
On the other hand, US Bitcoin ETF investors embraced a risk-on attitude, aligning with the recent rebound in BTC prices. These products observed net inflows over the past two days, interrupting a prolonged streak of outflows exceeding $1.2 billion.
It remains to be seen whether investors will uphold their confidence amidst the evolving risks associated with the unwind of carry trades.