Bitcoin: Japan’s “Yen Intervention” Amid Global Liquidity Concerns (Cryptocurrency:BTC-USD)

Investment Thesis

In my previous coverage of Bitcoin (BTC/USD), I predicted that Bitcoin momentum would be bullish heading into the second half of the year, but the market has since fallen sharply. Last month, I described some positive signs observed in active trading. Addresses holding Bitcoin and the cohort balances within these wallets show signs of Bitcoin’s upward trend.

However, just one week later, markets have been thrown into serious turmoil following policy decisions by the Japanese Federal Reserve and the Bank of Japan. (Bank of Japan) The 25bp interest rate hike sent shock waves through the markets last week. The impact of that hike is now being felt across global markets, with financial institutions looking to cover some of their trades, especially those involving the USD/JPY currency pair.

This will no doubt distort the risk/reward ratios I initially expected from Bitcoin, but I am still currently Market conditions will feel strong in the short term, creating a great buying opportunity for Bitcoin.

I remain bullish on Bitcoin despite expected short-term volatility.

Japanese “Yen Intervention” and its results

Two days after I wrote my last article on Bitcoin, the Bank of Japan surprised markets by raising interest rates by 25 basis points, the first time in 15 years. The bank also proposed slowing the pace of its massive bond-buying program, which at last count amounted to about 6 trillion yen ($38 billion) per month.

this “Yen Intervention” The Bank of Japan’s monetary easing complicates problems for the international liquidity system because Japanese financial participants are among the largest, if not the largest, holders of foreign equity and foreign debt in the world.

Decades of ultra-low interest rates have led financial participants in Japan to allocate the yen to instruments offering higher interest rates. Some foreign investors also regularly invest their capital in risk-on mode in riskier assets such as growth stocks and cryptocurrencies such as Bitcoin. The situation becomes even more risky when these financial participants borrow yen, create debt on their books, and invest that debt in financial assets to take advantage of the interest rate differential between a low interest rate environment such as Japan and the rest of the world.

This is also known as the yen carry trade, and it is one of the main scenarios that is unravelling globally as investors are forced to cover or completely liquidate their positions to avoid margin calls.

According to estimates by JP Morgan’s Asia team, “Around 90% of the shares bought by foreign investors since April 2011 have been sold off in the past few days.” The JPMorgan team noted that the sharp rise in the Japanese yen over the weekend led many market participants to take large losses and to limit their losses, particularly in the following positions: “Momentum trading is congested.”

According to the JP Morgan note, until most margin trading is removed from the system, the Japanese market will lead global markets in searching for the bottom of this market correction cycle.

Until markets find a bottom in the global correction, we expect markets to remain volatile, especially for risk assets such as Bitcoin and other digital assets.

Other Macro Concerns and Their Impact on Bitcoin

Another scenario that adds another layer of complexity is if the US Federal Reserve cuts interest rates at its upcoming meeting in September, especially after Fed Chairman Jerome Powell strongly hinted at the possibility of one rate cut next month. This would create a contrast between the dovish US monetary policy and the hawkish monetary policy of the Bank of Japan. Unless the market recovers by then, this contrasting monetary policy will create further friction for global investors, especially Japanese hedge funds who see the yen carry trade as less lucrative.

In addition to macro concerns, a series of weaker-than-expected economic data released last week is raising fears about the growth engines of the global economy, including the United States.

These developments over the course of a week changed things rapidly for investors, who quickly shifted out of risk assets like Bitcoin and into risk-off assets like long-term bonds, as shown in Exhibit C.

Bitcoin Outlook and Accumulation Plans

Given the market trends discussed above, Bitcoin volatility is expected to continue in the near term. This volatility has been exacerbated by Bitcoin’s strongest start to a calendar year in 2024, as seen in Exhibit D below, which may have led to increased levels of profit taking and position reductions.

Bitcoin’s strong start to the year correlates with a point made by JP Morgan’s Asia team and highlighted in the beginning of this article that momentum trades, especially margin-backed trades, are becoming crowded. As the JP Morgan team predicted above, we expect Bitcoin price to reverse once the market finds a bottom after margin trades are unwound.

At times like these, I think it is important to go back to the basics of any asset and reassess the soundness of its fundamentals. For example, there is a strong correlation between Bitcoin and global M2.

As long as global M2 continues to recover, we expect Bitcoin’s rally to regain momentum again, and we don’t believe Bitcoin’s notorious volatility will change the fundamentals here, especially as we have seen widespread adoption of Bitcoin recently through cryptocurrency ETFs.

In fact, I believe upcoming interest rate cuts by the US Federal Reserve will further increase liquidity and bolster the case in favor of Bitcoin.

We will continue to closely monitor on-chain metrics such as address activity and balance cohorts, which we covered in our article on Bitcoin last month, however, so far we have not seen any significant deterioration in these metrics discussed in our previous post.

In fact, Bitcoin’s current setup is so interesting to me that I have already allocated some capital at the $52,000 level and have some more left in case Bitcoin rises to the mid-$40,000 levels, as shown below.

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The notorious volatility associated with Bitcoin is a risk currently emerging in the market due to growing concerns stemming from various macro developments. However, as long as my outlook on liquidity remains positive and Bitcoin’s on-chain metrics remain strong, I believe these risks are less significant. The Bank of Japan may have provided a sufficient shock to market participants to bring risk asset valuation levels back to reality. This will bring many risk assets, such as Bitcoin, to levels that I would consider a buying opportunity.

Given the increased risk of volatility, I continue to recommend buying Bitcoin.

Editor’s Note: This article features one or more microcap stocks. Please be aware of the risks associated with these stocks.