Insidious Danger Awaiting Bitcoin and Altcoins: Analysts Warn Ahead

As markets prepare for the U.S. presidential inauguration on Jan. 20, 2025, analysts are sounding the alarm about a potential disruption in global market sentiment: a weakening of the yen carry trade.

This strategy, which relies on Japan's ultra-low interest rates, is facing significant pressure due to expectations of a rate hike by the Bank of Japan (BOJ).

“The BOJ rate hike will likely cause a significant unwinding of yen carry trades, which could dampen the enthusiasm of the ‘Trump Trade’ market,” Marcin Kazmierczak, COO of RedStone Oracles, told Reuters.

WeFi Head of Growth Agne Linge shared similar concerns, saying that the rate hike could lead investors to sell risky assets like Bitcoin to cover carry trade loans.

The yen carry trade, a long-standing investment strategy in which investors borrow yen at low interest rates to invest in higher-yielding global assets, could face a serious unraveling if the BOJ raises interest rates. Markets are closely watching the BOJ’s policy meetings next Thursday and Friday, with speculation the central bank could raise its short-term interest rate target to 0.45% from 0.25%.

Hawkish signals from BOJ Governor Kazuo Ueda and rising Japanese government bond (JGB) yields have fueled these expectations. A stronger yen would raise borrowing costs for investors using carry trades, potentially making it harder to liquidate global equities and riskier assets like BTC.

“If the BOJ raises rates, this could strengthen the yen and cause rapid unwinding of risky asset positions, causing a ripple effect in global markets, as we saw in early August 2024 when Bitcoin fell from $66,000 to $55,000 in a week,” Kazmierczak said.

While the weakening of the yen carry trade could dampen optimism around the “Trump Trade,” a term used to describe market optimism tied to President-elect Donald Trump’s pro-growth policies, Kazmierczak believes the impact will be gradual. “The important thing will be to watch how they balance domestic inflation targets against global market stability,” he said.

Bitcoin markets remain particularly fragile. BTC has already seen high volatility as investors monitor both BOJ policies and US economic developments. However, positive US Consumer Price Index (CPI) data released earlier this week supported risk sentiment.

“Core CPI data showed inflation rose less than expected,” Linge said, adding: “With the upcoming inauguration, the so-called ‘Trump Trade’ effect is likely to trigger a breakout in Bitcoin price, pushing it close to all-time highs.”

*This is not investment advice.