In a dramatic turn for the global cryptocurrency markets, Bitcoin (BTC) saw a sharp decline—dropping nearly 5% during Asian trading hours and nearing the $86,000 mark. This decline occurred against a backdrop of thin liquidity typical of the late weekend and triggered the liquidation of several hundred million dollars in long-leveraged positions across exchanges.
Japanese Market Moves Spark Global Ripple
Much of the recent volatility can be traced to mounting pressure from Japanese monetary policy. The Bank of Japan (BOJ), in its ongoing efforts to recalibrate its monetary stance, has reignited a wave of yen-carry trade unwinds. Japanese Government Bonds (JGBs) have surged, with two-year yields hovering near 1% and ten-year yields close to 1.9%, both at their highest levels since 2008. Meanwhile, overnight interest swaps are pricing in an approximately 80% probability of a rate hike by the BOJ in December.
This adjustment in Japanese monetary policy has global implications—particularly on carry trades, wherein global macro funds and major institutions borrow yen or short JGBs to invest in higher yielding U.S. dollar (USD) and Euro-denominated assets. As JGB yields climb, the cost and volatility of yen funding rise, prompting investors to reduce their exposure, starting with the most sensitive assets. As a result, Bitcoin and other high-beta digital assets are often first on the chopping block during market stress induced by the unwind of these carry trades.
The Mechanics of the Carry Trade Unwind
The phenomenon is underpinned by staggering, often opaque, financial flows. According to the September 2024 Bank for International Settlements (BIS) Quarterly Review:
- Notional foreign exchange (FX) swaps and forwards involving the Japanese yen reached a staggering $14.2 trillion (equivalent to about 1,994 trillion yen), with most of these positions residing off balance sheets, escaping conventional debt metrics.
- In contrast, visible on-balance sheet yen loans to foreign non-banks accounted for only $271 billion, highlighting the dominance of derivatives over direct lending in yen funding.
- About $1.7 trillion in yen liquidity is supplied by non-bank financial institutions, such as trustee accounts, which are notably sensitive to market volatility and prone to pulling liquidity during stressed market conditions.
As the yen becomes more costly and volatile, these substantial positions are unwound, compelling risk reduction in high-beta assets and generating a self-reinforcing loop of yen purchases that strengthens the Japanese currency further.
Chinese Crypto Crackdown Fuels FUD
Adding to the market stress was a renewed wave of anti-crypto rhetoric from China. The People’s Bank of China (PBoC) reaffirmed that all virtual currency trading is illegal and explicitly categorized stablecoins within anti-money laundering (AML) and capital flight regulations. This announcement triggered a sharp reaction in Hong Kong equity markets tied to crypto, with Yunfeng Financial falling over 10%, Bright Smart declining about 7%, and OSL Group losing more than 5%.
While the substance of China’s policy is not new—being merely the latest in a long series of crypto bans—the immediate market response highlights just how nervous and reactive investors remain in the current climate.
The Largest Liquidation Episode in Crypto History
The current turmoil comes hot on the heels of one of the most substantial liquidation events the crypto industry has ever seen. On October 11, 2024, a tweet about Trump tariffs sent BTC plummeting from approximately $120,000 to nearly $102,000 within 24 hours, causing the liquidation of $19 billion in open positions—the largest in the sector’s history. Stablecoins were not immune; USDe, for instance, briefly touched $0.65 on Binance, though Ethena, its issuer, executed $1.9 billion in redemptions while maintaining full backing and preventing wider contagion.
Despite this resilience, the supply of USDe has dropped precipitously—down nearly 50% from its $14 billion peak to around $7 billion. This is largely attributable to increasingly unattractive carry opportunities in the wake of October’s liquidation cascade. Funding rates for both BTC and ETH are now either muted or negative and have consistently underperformed three-month U.S. Treasury yields.
Ethena and Deleveraging: The Low-Yield Environment
Ethena’s transparency dashboards illustrate the broader shift: negative funding rates across major cryptocurrencies have led to more than 63% of system assets sitting in liquid stablecoins instead of being deployed into delta-neutral strategies that balance long and short exposure for consistent returns. The sUSDe—Ethena’s synthetic stablecoin—has trailed USDC borrow rates, further eroding the attractiveness of yield-enhancing strategies.
This deleveraging cycle is also evident in related decentralized finance (DeFi) protocols such as Aave and Pendle. ‘Looping’ strategies—using sUSDe as collateral to borrow USDC and then reinvesting—became unviable when USDC borrowing costs (4.87%) overtook sUSDe yields (4.77%). Furthermore, the expiration of key Pendle tranches in November resulted in total value locked (TVL) on Aave tumbling from over $5.4 billion to a mere $340 million.
The Road Ahead: What Would Restore Crypto Yields?
Looking forward, the market is facing a challenging environment for yield recovery. The next major Pendle expiry, scheduled for February 2026, is pricing in yields of just 5.8%—the lowest of any previous expiry. At these rates, ‘looping’ strategies in Aave remain unprofitable, suggesting that TVL and utilization will stay suppressed unless sUSDe yields reclaim their historical advantage over borrowing costs.
For a sustainable recovery in yields, two conditions are required:
- Higher Directional Appetite: There must be renewed interest in directional trades, driving up demand and widening the perpetuals (perp) basis.
- Increased Volatility: ETH volatility must rise to restore positive funding rates and reinvigorate delta-neutral strategies.
Yet, as the crypto sector becomes increasingly institutional—characterized by larger market makers and deeper derivatives liquidity—the base case remains one where funding rates trend lower, potentially keeping yields subdued for an extended period.
Macro Uncertainty and Crypto Market Sensitivity
Bitcoin’s front-row position in the liquidation queue underlines the asset’s sensitivity to shifts in global funding environments. As yen funding grows costlier and global monetary policies grow less synchronized, digital assets become susceptible to outsized moves in response to macro changes. This high sensitivity is exacerbated by ongoing regulatory uncertainty—like the latest anti-crypto signaling from China—ensuring that even seemingly recycled news can push investors into defensive mode quickly.
Recent developments reflect a larger truth: the age of easy, high-yield opportunities in crypto is facing its most formidable test. With major shifts underway across international funding markets, regulatory posturing, and internal DeFi incentives, both professional and retail participants are closely watching for the next catalyst that could either restore some of the lost luster to crypto yields or deepen the ongoing period of adjustment and consolidation.
Conclusion: Navigating the New Crypto Normal
The recent confluence of Japanese monetary tightening, renewed regulatory threats from China, and a collapsing yield environment for crypto yield farmers underscores the increasingly interconnected and sensitive nature of the digital asset markets. As carry trades unwind and the macro environment remains unpredictable, volatility and sudden liquidity shifts are likely to remain hallmarks of the sector for the months ahead.
For now, the crypto community must adjust to this evolving landscape—waiting for either a fresh bout of risk appetite or a structural shift in funding dynamics to revive the yield engines that have powered DeFi and digital assets through much of their recent growth. Only time will tell whether such catalysts emerge, but participants must be prepared for continued turbulence as the new crypto normal takes shape.
