Bitcoin: Arthur Hayes sounds alarm as Japanese Yen strengthens

• BTC could be at risk as carry trade unwind persists.
• Will the risk-on mode from US BTC ETF investors continue? 

According to experts, Bitcoin [BTC] risk could compound amid ongoing Japanese-linked carry trade unwind. The largest crypto asset saw a relief rally to $58K earlier in the week. However, it erased some gains after the Trump-Harris US presidential debate. 

Besides the US elections, the ongoing carry trade unwind, which triggered the early August dump to $49K, could affect BTC. The sell-off was linked to strengthening the Japanese Yen against the US dollar.

Will carry trade unwind affect BTC?

A similar trend has been flashed, tipping BitMEX founder Arthur Hayes to sound a risk warning. He said, 

“$USDJPY breaking down, it’s about to be goblin town all over again in markets as it approaches 140. Let’s see if $BTC can hold up.”

Source: X

For context, investors enter carry trade by borrowing from low or near-zero interest-rate currencies for higher-return assets. For about 17 years, the Yen has been the cheapest (almost zero interest rates), attracting carry trade investors who seek higher returns in US markets. 

But this changed when the BoJ (Bank of Japan) hiked interest rates in August, triggering a carry trade unwind (closing positions) and a sell-off that also affected crypto markets. 

According to Yardeni Research, the carry trade could continue, especially amid next week’s expectations of a 50 bps (basis points) Fed rate cut and liquidity pump. Part of Yardeni’s recent report read, 

“Expectations that the Fed will lower our interest rates, while the Bank of Japan raises their interest rates are boosting the yen and forcing traders to unwind their carry trades.”

That said, the carry trade unwind impact on Bitcoin could be elevated given the strong positive BTC correlation to Nasdaq than gold. In short, another market sell-off might not spare BTC.  

Source: CryptoQuant

Meanwhile, US BTC ETF investors adopted a risk-on approach, matching the recent BTC relief recovery. The products experienced net daily inflows over the past two days, breaking a long streak of over $1.2 billion in outflows.

Whether investors will maintain confidence amid carry trade unwind risks remains to be seen