Chain reaction of cryptocurrency crashes: Bank of Japan's interest rate hike signals trigger a global liquidity crisis

The cryptocurrency market has recently experienced a sharp correction, with the driving forces behind the virtual currency plunge exceeding market expectations. Supported by the Federal Reserve’s rate cut policies, Bitcoin and Ethereum have yet to escape unscathed. The true root of this downward storm points to the Bank of Japan’s shift in monetary policy.

Rapid Decline in the Crypto Market, Multiple Factors at Play

Back in early December, cryptocurrencies came under pressure across the board. Bitcoin dropped as much as 5% intraday, quickly breaking the $90,000 mark and reaching a low of $85,689. Ethereum also declined, falling 5.9% and breaking below the $3,000 support level. Other virtual currencies suffered even heavier losses, with ZEC down 15.51%, HYPE and DOGE decreasing by 9.84% and 6.2%, respectively.

According to data from Coinglass, approximately 180,000 traders faced liquidations in a single day, with total losses reaching $537 million. This large-scale liquidation wave reflects a rapid shift in market sentiment and exposes the vulnerability of the crypto market during liquidity shortages.

Expectations of BOJ Rate Hikes Rise, Liquidity Risks Emerge

On the surface, the Federal Reserve’s accommodative stance should be favorable for the crypto market, but the real turning point came with signals from the Bank of Japan. BOJ Governor Ueda Kazuo announced that the central bank would weigh the pros and cons of raising interest rates at the next policy meeting — the strongest signal to date of expectations for a rate hike.

Market traders responded swiftly. According to overnight index swap (OIS) pricing, the probability of the BOJ raising rates in December surged to 76%, up from 58% the previous day, an increase of over 18 percentage points. The cumulative probability of a rate hike before January next year is even higher, reaching 94%.

This shift immediately impacted currency and bond markets. The 10-year Japanese government bond yield rose further to 1.877% during trading hours, while USD/JPY quickly fell to 155.37, a noticeable decline. The Japanese stock market fell below 50,000 points, with the Nikkei 225 closing down 1.89%, ending a four-day winning streak.

Fluctuations in U.S. Treasury Yields Drive Capital Flows

The key point is that the rising expectations of BOJ rate hikes will trigger a chain reaction. As the yen appreciates, overseas capital will accelerate its return to Japan. The BOJ’s rate hike actions will push up Japanese bond yields, thereby lowering bond prices. Japanese financial institutions face a dilemma: to suppress domestic yields and stabilize the bond market, they may be forced to sell U.S. Treasuries and buy Japanese bonds instead.

This process signals a reallocation of global liquidity. As risk assets, cryptocurrencies are often the first to see capital withdrawal. The sharp decline in Bitcoin and Ethereum reflects investors’ defensive response to liquidity risks worldwide.

Technical Support Remains Steady, Rebound Pattern Awaiting Confirmation

From a technical perspective, Bitcoin’s daily chart shows that although it broke below the $90,000 psychological level, it remains within a rebound cycle framework. The support zone between $85,000 and $86,000 still needs confirmation. If this zone can hold effectively, Bitcoin may still challenge the $90,000 and even $95,000 levels.

Optimistically, as the market gradually digests the BOJ rate hike expectations and adjusts its outlook, the impact of liquidity risks on the crypto market is expected to ease. Once the BOJ’s policy path becomes clearer, overseas capital inflows are likely to stabilize, and the flow between U.S. and Japanese bonds will reach a balanced state. In this context, the crypto market is expected to gradually recover from liquidity shortages, with potential for a rebound.

Note: As of late February 2026, Bitcoin has rebounded from its lows to around $65,840, a rally of over 23%. Ethereum has also recovered to approximately $1,920. This confirms that after the correction of liquidity risk expectations, the crypto market’s recovery trajectory is underway.