Investors lent Japanese Yen to invest in Bitcoin and Nvidia – But then Japan raised interest rates
Last Updated on 13 August 2024 by CryptoTips.eu
Now that the dust from last week’s stock market storm has settled, analysts are wondering what exactly happened. An investigation by several media behemoths found that the main culprit appears to have been the so-called ‘Yen Carry trade’, in which investors borrowed money in Japanese Yen (with an interest rate close to 0) and then invested that money in things that did very well, such as the American chip maker Nvidia or the largest digital coin, Bitcoin. A fairytale that continued until the Japanese central bank did the unexpected and raised interest rates. Then it all came tumbling down.
1999
At the end of the 1990s, the Japanese stock markets had been dropping for a decade or so. At that moment, the Japanese Central Bank started an experiment that lasted two decades, namely zero interest rates. Whatever happened, interest rates in Japan remained very low or were simply set at 0.
Ever since 2013, the ‘Yen Carry Trade’ therefore became very popular among Western investors. The logic goes like this: if you know that a certain investment will yield 5% per year (the average profit on the S&P500 over the last twenty years, for example), you borrow in Japanese Yen at an ultra-low interest rate and pocket the difference as profit.
So, for example, you pay 2% on your loan to earn a profit of 5%. The difference, 3%, is yours.
The price of #Bitcoin dropped significantly in the early morning hours of August 11, 2024, due to several factors. One major reason was the unwinding of the Japanese Yen (#JPY) carry trade, which began around August 5th. In just over a week, #Bitcoin prices fell by about 30%. The… pic.twitter.com/7Pcar7LFpW
— Crypto Granth (@CryptoGranth) August 12, 2024
Since the beginning of this year, investors saw that Nvidia and Bitcoin were doing very well, so more and more money was borrowed (in Japanese Yen) to invest in those two investments (Nvidia shares and a Bitcoin ETF).
0.25%
The turning point came on July 31, when the Japanese central bank raised interest rates from 0 to 0.25% for the first time since 2007. The Japanese Yen suddenly strengthened against the US dollar. Investors rushed to reassess their loans as their repayments suddenly became more expensive. On top of that, Bitcoin had not been doing well for several months, and even Nvidia experienced a dip.
Looks like Bitcoin and NASDAQ were the preferred trades on the other side of the Yen Carry Trade.
— Spencer Hakimian (@SpencerHakimian) August 8, 2024
What happens if the Fed comes in hawkish relative to expectations over the next 6-12 months and the BOJ comes in dovish relative to expectations?
Bitcoin and NASDAQ go to the… pic.twitter.com/0gCN0AMBva
That information, combined with a bad jobs report from the United States on Friday, August 1, set off a huge movement that resulted in a lot of phone calls and emails to Japanese banks canceling loans over the weekend of August 2 and 3.
The Japanese Yen Carry Trade was suddenly a lot less popular and the Asian stock markets reacted accordingly when they reopened.
On Monday, August 4, the markets reopened and Japan’s stock market crashed with a massive plunge. Bitcoin and Nvidia were also hit hard that day. Since then, the dust has settled and everything seems a little more normal again.