A potential increase in interest rates from the Bank of Japan is weighing on one of the most popular trades on Wall Street: the yen carry trade.

Why it matters: A rise in Japanese rates while the Federal Reserve cuts rates would thwart a borrowing strategy long used to buy risky assets like bitcoin and tech stocks.

What they're saying: The Japanese carry trade will become a "thing of the past" within the next few years, Nic Puckrin, an investment analyst and cofounder of Coin Bureau, a crypto information platform, tells Axios.

How it works: For decades, investors have borrowed cheap Japanese yen and used it to buy higher-yielding assets abroad, pocketing the difference.

• It works as long as the yen stays weak and Japanese rates stay low.
• That is changing, with the Bank of Japan considering higher rates just as the Fed is expected to make another cut, bringing the interest rates of the two nations closer together.

Driving the news: Bank of Japan governor Kazuo Ueda teased a potential rate hike yesterday, saying the central bank would weigh the "pros and cons" at its next policy meeting later this month, Reuters reported.

• His comments led two-year Japanese yields to spike to their highest level since 2008 as traders priced in a 76% chance of an interest rate increase.
• In response, traders sold off assets to pay back the yen they borrowed.
• Bitcoin tumbled overnight, triggering about $1 billion in liquidations.

Zoom out: This is not the first time a Bank of Japan shift has rattled markets.

• In August 2024, an unexpected hawkish turn by the central bank triggered a much more violent unwind of yen-funded positions.
• Bitcoin plunged about 18% in a matter of days, and currency markets, emerging markets and U.S. stocks were all swept up in the shock.
• Today's turbulence is smaller since much of the trade was flushed out last year, and a possible Japanese rate hike has been more widely anticipated.

What to watch: Where the yen carry trade goes from here.

• As Japan normalizes rates, markets are adjusting to a world where one of the biggest behind-the-scenes drivers of global risk appetite is no longer guaranteed.
• Short term, that shift is weighing on crypto and other more speculative investments. Longer term, it could be the end of an era when ultra-loose Japanese monetary policy reliably underwrote risk-taking worldwide.

Bitcoin came under pressure again yesterday, proving its tepid recovery last week would be difficult to sustain amid over $1 billion in forced liquidations within 24 hours.

Why it matters: Crypto is proving to be the ultimate risk-on asset, falling first and hardest at seemingly any sign of trouble across markets.

Catch up quick: The latest bitcoin plunge came overnight Sunday, sparked by jitters over the yen carry trade.

• The slide carried into U.S. trading yesterday, when it triggered around $1 billion in forced liquidations across crypto and sparked fresh concerns of selling from battered bitcoin treasury companies.

By the numbers: As of yesterday afternoon, bitcoin was back trading at under $85,000, essentially erasing a small recovery that started on Nov. 2.

• Bitcoin is down nearly 32% from its record high of $126,080 on Oct. 6.

What they're saying: "It's probably one of the most susceptible (assets) to risk-off catalysts," says Puckrin of Coin Bureau, explaining bitcoin's softness over the past couple of months.

State of play: A few factors are adding to its recent sensitivity.

• Forced liquidations — when a trader's position is automatically closed by an exchange due to collateral falling below a required margin threshold — has sapped the crypto market of liquidity, exacerbating the impact of negative headlines, Puckrin notes.
• Meanwhile, there has not been much buying from ETFs and crypto treasury companies lately, which had been supplying a lot of new demand this year.

What to watch: The key level to watch for bitcoin is $82,000, Puckrin says.

• That is the number widely cited as the average cost-basis "cluster" for many ETF investors and bitcoin treasury companies. If bitcoin crosses that figure, there is likely to be a lot more talk of bears across the crypto market.

Gold and silver are both beating the S&P 500 this year, with silver up over 99% and gold up over 61% in 2025.

Why it matters: The rally in metals indicates investors are looking to protect their portfolios from inflation and diversify away from dollar-based assets.

What they're saying: "As the year ends (with elevated equity valuations and tight credit spreads), inflows from market participants may continue as fundamentals and diversification benefits align," writes Jim Wiederhold, commodity indices product manager at Bloomberg.

• That means investors are getting skittish about stock valuations coupled with expected sticky inflation. Metals like gold and silver are historically viewed as safe havens that are also diversified out of the U.S. dollar, thus providing multiple benefits for concerned investors.

The bottom line: Wiederhold describes the 2020s as a commodities supercycle, which means these gains could have room to run.

• Whether that happens could depend on the bigger economic picture: how sticky inflation is and how central banks view the need to diversify out of dollar-based assets.