The crypto market flash crash in early December looked like a technical correction on the surface, but in reality, it was triggered by the Bank of Japan's sudden hawkish shift. Kazuo Ueda’s statement on December 1—that there might be further rate hikes after the 2026 spring labor negotiations—directly set off a global wave of yen carry trade unwinding. Simply put, for the past few years, countless institutions borrowed ultra-low-interest yen and used it to buy high-yield assets like US Treasuries, US stocks, and cryptocurrencies for arbitrage. Now, with Japan tightening monetary policy and the yen appreciating, this strategy no longer works—they have to sell assets quickly to pay back their loans. On December 2, BTC and ETH took a deep dive, essentially as a chain reaction to this.

But the market quickly realized it wasn’t that simple. The Fed is moving in the opposite direction: there’s an 89.2% chance of a 25 basis point cut in December, and another 50 to 100 basis points likely to be cut in Q1 next year. The November nonfarm payroll numbers were dismal, with only 22,000 jobs added and the unemployment rate climbing to 4.3%, while core PCE inflation remains stuck at 2.8%. This awkward "employment collapse but inflation persists" scenario is forcing the Fed to keep easing. Although Citi and Morgan Stanley have different forecasts, their base cases both point to rates dropping to around a neutral 3% by March next year.

With the two central banks moving in opposite directions, the crypto market has become a battleground. In the short term, the spillover effect of Japan's tightening is indeed fierce—after yen speculative positions turned positive, the panic from carry trade unwinding eased, but long-term arbitrage risks still linger. As a major holder of US Treasuries, Japan’s rate hikes mean capital flows back home, tightening global liquidity and pushing the 10-year US Treasury yield to the 4% mark. In this scenario, the safe haven appeal of US Treasuries temporarily fails, and funds may instead flow into derivatives and hedging tools.

The mid- to long-term logic is much clearer. The Fed’s easing cycle is the main theme; as short-term yields fall, the yield curve steepens, the appeal of risk-free rates diminishes, and high-beta assets like BTC and ETH become more attractive. From the bottom, BTC has already rebounded over 7%, and ETH has surged more than 14%. This trend is similar to ETH’s rally ahead of the Bitcoin ETF launch—risk assets usually perform well in Q4, and with rate cut expectations, the rebound has plenty of room.

So the current situation is: in the short term, Japan’s rate hike tightening pressure is indeed weighing on market sentiment, but in the longer run, the Fed’s easing remains the dominant variable. The unwinding of yen carry trades might cause a few more bouts of volatility, but as long as the Fed keeps cutting rates, liquidity will ultimately flow back toward risk assets.