The Bank of Japan's rate hike signals trigger a chain reaction, causing a liquidity storm at the start of December in the crypto market

On the first day of December, the cryptocurrency market experienced an unexpectedly sharp decline. During Monday’s session, Bitcoin dropped by 5% intraday, breaking below the $90,000 mark and reaching a low of $85,689; Ethereum (ETH) also fell by 5.9%, breaking below $3,000. Several coins showed weakness, with ZEC down 15.51%, HYPE and DOGE down 9.84% and 6.2% respectively. According to Coinglass data, about 180,000 traders were liquidated in the past 24 hours, totaling $537 million.

This decline seems abrupt, but underlying market logic is at play. The topic of the Federal Reserve’s independence has recently attracted attention, as Trump has confirmed the successor to Fed Chair Powell and will announce it soon. The market expects Kevin Hasset, Director of the White House National Economic Council, to succeed Powell. This change has impacted the dollar, causing it to retreat, while precious metals surged—gold hit a two-week high of $4,256, and silver rose to $57.8, approaching the $58.0 historical high.

However, the real trigger for the liquidity crisis in the crypto market came from across the Pacific. Japan’s central bank governor Ueda Kazuo stated on Monday that the bank would weigh the pros and cons of a rate hike at the next monetary policy meeting, which was interpreted as the strongest signal of a possible rate hike later this month. The Bank of Japan plans to hold its monetary policy meeting on December 18-19. Following the signal, based on overnight index swap (OIS) pricing, the market’s probability of a rate hike in December surged from 58% to 76%; the chance of a rate hike before January next year rose to 94%. This shift in expectations immediately impacted the forex market—10-year Japanese government bond yields rose further to 1.877%, and USD/JPY fell to a session low of 155.37. The Japanese stock market also ended its four-day rally, falling below 50,000 points, closing down 1.89%.

Market participants generally point out that liquidity shortages are the fundamental cause of the crypto market’s sharp decline. FalconX Asia-Pacific derivatives trading head Sean McNulty said the biggest concern is the limited inflow of funds into Bitcoin ETFs and the lack of buyers stepping in on dips. The release of rate hike expectations by the Bank of Japan will further worsen this situation—weak yen will push up inflation, prompting Japanese financial institutions to accelerate asset reallocation. Overseas funds will flow back to Japan, and with the BOJ raising rates and pushing up JGB yields, Japanese financial institutions may be forced to sell U.S. Treasuries to buy JGBs to keep yields low, creating a series of liquidity withdrawal effects.

Looking ahead, analysts believe that liquidity risk will have limited impact on the crypto market. As the market digests and gradually adjusts its expectations regarding the BOJ’s rate hike, Bitcoin is still expected to continue its rebound trajectory.

From a technical perspective, Bitcoin’s daily chart shows that although it broke below the $90,000 level, it remains within a rebound cycle framework. Key support levels to watch are in the $85,000-$86,000 range. If this support holds effectively, Bitcoin may still challenge resistance levels at $90,000 and even $95,000 in the future.