Long traders, take note! This move by the Bank of Japan could have a bigger impact than you think.

The Bank of Japan plans to hold a monetary policy meeting on December 18-19, and market expectations for a rate hike have already surpassed 70%—with a high probability that rates will be raised directly from 0.5% to 0.75%. This would be the largest move in 17 years. As the world’s second-largest liquidity currency, changes in yen policy are definitely a big deal.

In the short term, the crypto space will face direct impacts:

Carry trades are about to collapse. For the past decade or so, people have been borrowing low-interest yen to invest in high-yield assets like Bitcoin—it's been a pretty smooth game. But now with rate hikes, the cost of yen borrowing rises, the yen appreciates, and the arbitrage opportunity is directly compressed. Investors will definitely prioritize selling off crypto positions—since they’re highly liquid and easy to rebalance. Last time a rate hike was merely anticipated, Bitcoin plunged over 8%, and Ethereum dropped nearly 9%. If the hike actually happens this time, the selling pressure will only be stronger.

Global liquidity is tightening. Japan is the last major central bank to exit ultra-loose monetary policy, and this move means a definitive tightening of global liquidity. As risk appetite declines, capital naturally flows to safe assets like government bonds. As Japanese bond yields rise, domestic institutions will surely repatriate overseas investments to allocate more to domestic bonds. With no new inflows and existing funds withdrawing, how can prices not be suppressed?

Valuation logic is also changing. The value of cryptocurrencies largely relies on market expectations of high future returns. Rate hikes push up the benchmark for global asset pricing, and for non-yielding assets like crypto, the discount rate increases, risk premium narrows significantly, and with the change in valuation logic, market prices are naturally pushed down.

However, in the medium to long term, the crypto space still has structural support, so a sustained plunge is unlikely. But in the short term, this shock is definitely something to be wary of.