Bitcoin: Implications Of Japan’s ‘Yen-Tervention,’ Global Liquidity Concerns

Summary Markets experienced severe turmoil after Japan’s BoJ rate hike, impacting global liquidity and creating elevated levels of volatility globally. BoJ’s “Yen-tervention” led to market complications, the possibility of margin calls, and the unwinding of trades, affecting global markets and creating volatility. With the U.S. Fed moving to cut rates soon, the diverging monetary policies raise questions about global liquidity along with recent weak economic data. However, most of the volatility is expected to be short-term due to the volume of carry-trades unwinding and is expected to put a floor in global markets soon. Global M2 levels and Bitcoin’s on-chain metrics see no meaningful change in levels, pointing to a reversal in Bitcoin prices soon. Investment Thesis Markets have lost a lot of ground since my last coverage on Bitcoin ( BTC/USD ), where I was bullish about Bitcoin’s momentum heading into H2. Last month, I explained the positive signs that I observed in the active addresses holding Bitcoin, as well as the cohort balances in these wallets, signaling indications for uptrends in Bitcoin. But within just a week, markets are now in severe turmoil after Japan’s Fed or the BoJ (Bank of Japan) shocked markets with a 25-bp rate hike last week. The implications of that rate hike are now being felt by global markets, with financial institutions looking to cover some of their trades, especially those that have any connection originating from the USD/JPY currency pair. This is definitely going to skew the risk/reward that I originally anticipated for Bitcoin. But I still believe that current market conditions will be felt strongly in the near term, presenting sizable buying opportunities for Bitcoin. I continue to stay bullish on Bitcoin despite the near-term volatility that I expect. Recapping Japan’s “Yen-tervention” & its consequences Two days after I wrote about my previous Bitcoin coverage, the BoJ completely caught markets by surprise hiking rates by 25-bp for the first time in 15 years. In addition, the BoJ also proposed to slow down its gigantic bond buying program which at last count was about ¥6 trillion or $38 billion per month . Exhibit A: Japan’s BoJ hikes rates for the first time in 15 years causing concerns of a liquidity crunch. (Reuters) This “Yen-tervention” by the BoJ has complicated matters for the global liquidity system because Japanese financial participants are one of the largest holders , if not the largest holders, of foreign equity and debt in the world. Due to decades of ultra-low interest rates, Japanese financial participants have been allocating their Yen to avenues that offer higher interest rates. Some foreign investors also periodically invest their capital in risk-on modes towards riskier assets such as growth stocks or cryptocurrencies such as Bitcoin. The situation becomes riskier if these financial participants borrow Yen, creating liabilities on their books and investing those liabilities in financial assets to take advantage of the interest rate differentials between low-rate environments such as Japan and the rest of the world. This is also called the Yen carry trade, and this is one of the primary scenarios that seem to be unwinding globally as investors are forced to either cover their positions or liquidate them entirely to avoid margin calls. According to J.P. Morgan’s Asia team’s estimates , “around 90 percent of the stocks bought by overseas investors since April 2011 have been dumped over the past few days.” J.P. Morgan’s team noted that many market participants saw huge losses as the Japanese Yen accelerated over the weekend and rapidly moved to cut their losses, especially in positions such as “overcrowded momentum trades.” According to J.P. Morgan’s note, until most of the margin trades are cleared out of the system, Japanese markets will lead global markets in searching for a bottom in this market correction cycle. Exhibit B: J.P. Morgan’s Team believes that the current volatility is being led by currency trades cutting losses and unwinding margin trades, impacting risky assets such as Bitcoin. (J.P. Morgan Asia Quant Team via FT) Until markets are globally unable to find any floor in the correction, I would expect volatility in markets, especially risky assets such as Bitcoin and other digital assets. Other Macro Concerns & Their Implications on Bitcoin The other scenario that adds another dimension of complication is that the U.S. Feds are poised to cut rates in the upcoming September meeting next month, especially after Fed Chair Jerome Powell strongly hinted at one possible rate cut next month. This puts the dovish U.S. monetary policy in contrast to the hawkish monetary policy coming from Japan’s BoJ. The contrasting monetary policies will create some more friction for global investors, especially Japanese-originating hedge funds that the Yen carry trade beneficial unless markets recover by that point. To add to the macro concern, the flurry of economic data released last week that fell below expectations has added more concern to the global economic growth engine, including here in the U.S. These developments in these situations in a week have created a rapidly evolving landscape for investors who have moved to quickly trade out of risky assets such as Bitcoin and into risk-off assets such as long bonds, as seen in Exhibit C. Exhibit C: Investors are rotating out of risk-on assets into risk-off assets. (tradingView) My Outlook & Accumulation Plan for Bitcoin Based on the market developments that I highlighted earlier, I expect volatility in Bitcoin to persist in the near term. This volatility may have become even more pronounced after Bitcoin had one of the best starts of its calendar year in 2024, as seen in Exhibit D below, leading to elevated levels of profit-taking and position cuts. Exhibit D: Bitcoin’s 2024 YTD Performance Versus Prior Years (Yahoo Finance) The strong start to Bitcoin this year correlates to the point that J.P. Morgan’s Asia team made what I highlighted earlier in this post about momentum trades becoming crowded, chiefly those trades that were propped by margin. Once the markets find a floor after the margin trades unwind, as J.P. Morgan’s team has estimated above, I expect a reversal in Bitcoin’s price. In times like these, I find it crucial to go back to the basics of every asset and review the health of those fundamentals. For example, Bitcoin’s correlation to global M2 is strong. Exhibit E: Recovery in Global M2 will aid the price of Bitcoin (bGeometrics) As long as global M2 continues to recover, I expect Bitcoin’s ascent to regain ground again. I do not see Bitcoin’s notorious volatility changing any fundamentals here, especially as widespread adoption of Bitcoin has been seen recently by crypto ETFs. In fact, I believe that the upcoming interest rate cut from the U.S. Feds will further boost liquidity, helping my case for Bitcoin. Exhibit F: M2 in the U.S. continues to recover, up 0.9% y/y (U.S. Feds) I will keep a close eye on some on-chain metrics, such as address activity and balance cohorts, that I highlighted in my previous coverage last month on Bitcoin. However, so far, there has been no meaningful deterioration in these metrics that I highlighted in my previous post. In fact, the current setup of Bitcoin looks very interesting to me, and I have already allocated some capital at the $52k levels, leaving some more dry powder if Bitcoin moves into the mid-forty thousand levels, as illustrated below. Exhibit G: Bitcoin’s weekly price chart since 2014 (TradingView) Takeaway The notorious volatility that Bitcoin is associated with is currently the risk that is playing out in the markets due to elevated levels of concern arising from a multitude of macro developments. But those risks are not as meaningful, in my opinion, as long as my outlook for liquidity remains strong and Bitcoin’s on-chain metrics look solid. Japan’s BoJ may have shocked market participants enough to revise their valuation levels of risk assets back to earth, and that gets many risk assets, such as Bitcoin, to levels that I deem as buying opportunities. I continue to recommend a Buy on Bitcoin amidst elevated volatility risks. t

Source: Seeking Alpha