Cryptocurrencies fall as yen carry trade impact seen across all riskier assets

Cryptocurrencies on Monday saw a sharp fall with heavyweights such as Bitcoin and Ethereum falling over 10%. The fall was triggered by the Bank of Japan’s decision to hike interest rates, which have impacted carry trades across riskier assets such as cryptocurrencies.

Carry trade is a strategy in which traders borrow money in low-interest-rate economies such as Japan and deploy the capital in higher-yielding assets. The Japanese yen has traditionally been popular for carry trades due to its negative interest rates.

An increase in the interest rate, which causes the currency to rise, brings about some “carry trade unwinding” where traders square off some of their positions to protect against currency appreciation.

In 2024, the Bank of Japan hiked interest rates for the first time in 17 years. The first interest rate hike was announced in March and the second hike was announced on July 31 when the Bank of Japan increased the interest rates to 0.25%.

The Bank of Japan took the decision to support the weak yen and bring stability to the currency. Higher interest rates will not only make borrowing more expensive, but it will also impact carry trades.

Additionally, rising geopolitical tensions and growing worries about a US recession have added to the sell-off in crypto markets.

Consequently, the cryptocurrency market felt the impact of high interest rates and a climbing yen.

Bitcoin was trading lower by nearly 13% at $52,393. In the past 24 hours, the coin had tumbled to hit a low of $49,314. Bitcoin is trading at its lowest level in nearly 5 months.

Ethereum was under pressure and was down by 13% at $2,340. The cryptocurrency had touched its lowest level in around 6 months at $2,112 but managed to recover from the lows.

Other coins such as Ripple, Binance Coin, and Solana saw substantial selling pressure as well and were trading lower by over 10% on Monday.