Just a day after the U.S. Congress rejected the Virtual Asset Market Structure Bill (Clarity Act), the Federal Reserve raised interest rates, and speculation about further hikes by the Bank of Japan (BOJ) emerged. With regulatory uncertainties and tightening global liquidity, concerns are mounting about a potential repeat of last year’s yen carry trade unwinding.
As of 3:48 p.m. (KST) on Thursday, Bitcoin’s global price stood at 76,514 USD, up 0.76% from the previous day. Ethereum and XRP also saw gains of 1.86% and 0.63%, respectively. While major cryptocurrencies rebounded slightly, they haven’t returned to pre-Clarity Act vote levels.
On Tuesday, the U.S. Senate held a procedural vote on discussing the Clarity Act in a full session. The vote fell short, with 49 in favor and 50 against, failing to secure the required 60 votes for passage.
The Clarity Act aims to define the jurisdictions of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) over virtual assets and establish a regulatory framework for exchanges. Its failure has increased the likelihood of prolonged regulatory uncertainty.
Following the vote, Bitcoin briefly dipped below 75,000 USD, while XRP experienced a sharp 10% drop.
Tiger Research analyst Yoon Seung-sik noted that the Clarity Act’s rejection was largely anticipated due to ethical concerns and political disagreements. It estimates that 80-90% of the potential impact was already priced in.
The day after the bill’s rejection, additional tightening pressures emerged from the U.S. The Fed raised the benchmark interest rate by 0.25 percentage points to 3.75-4.00%, marking the first increase since 2023.
The Fed has left the door open for further hikes this year. Rising interest rates typically boost safe-haven assets while potentially diminishing the appeal of risk assets like Bitcoin.
Yoon explained that the main factors pressuring the market are the Fed’s rate hike and renewed monetary tightening. The risks of sustained high rates and reduced liquidity, already 50-60% priced in, could exert long-term downward pressure.
The industry is closely watching the Bank of Japan’s monetary policy decision on the 18th. Markets anticipate a likely 0.25 percentage point increase in the benchmark rate to 1.25%.
Rising Japanese bond yields could prompt investors to choose bonds over non-interest-bearing Bitcoin. CoinDesk analysis suggests that higher bond yields may limit Bitcoin’s rebound by reducing its relative attractiveness.
Concerns about unwinding yen carry trades are resurfacing. This strategy involves borrowing low-interest yen to invest in assets like Bitcoin or U.S. stocks. A rate hike in Japan would increase yen borrowing costs, potentially triggering asset sales to repay yen loans.
Similar concerns in late last year contributed to a crypto market downturn. During the August 2024 liquidation shock, Bitcoin plummeted nearly 20% in just days.
However, some analysts suggest that the potential for massive yen carry fund outflows may be limited this time. Even with a Japanese rate hike to 1.25%, the U.S.-Japan interest rate gap would remain above 2.5 percentage points, likely sustaining yen-funded investment strategies.
Yoon commented that the market has already factored in a 60-70% chance of a BOJ rate hike. A widespread liquidation of yen carry funds, similar to past events, seems unlikely.
He added that much of the high-leverage positions in the derivatives market have been unwound. Bitcoin spot ETFs and institutional funds can help support price floors and absorb temporary volatility.
The yen’s movement following the BOJ’s announcement is expected to set the tone for the crypto market. If the BOJ signals further rate hikes and the yen strengthens rapidly, concerns about yen carry fund outflows could resurface.
Yoon emphasized that to gauge further downside potential, it needs to watch if the dollar-yen exchange rate holds around 140 JPY (about 1 USD). It’s also crucial to monitor the Fed’s net liquidity trends, which indicate actual dollar circulation in the market.