Hey Edge readers,

December has arrived and the year-end Santa rally is off to a rough start. Between a wobbling yen carry trade, renewed rate jitters out of Japan, and another sharp leg down in crypto, markets are reminding everyone that liquidity still runs the show.

In this issue, we break down why the Bank of Japan suddenly matters to your crypto exposure, how the unwind of the yen carry trade is spilling into BTC and broader risk assets, and what this latest flush tells us about the current state of the market.

Stay sharp. 🫡

-The Exponential team

Why Crypto Dumped Again (And What Japan Has To Do With It)

Disclaimer: This content should not be taken as financial advice. Always do your own research before making any investment decisions.

Crypto sold off hard again today. Bitcoin dropped as much as ~8%, briefly trading below $84K before bouncing, with Ether and majors down in the mid-single digits to low teens. This isn’t about some new bug in a protocol or a blow-up of a single company. The main story is macro, and it’s coming from a place most crypto natives don’t usually watch: the Bank of Japan.

The short version of this story is that the yen carry trade is starting to wobble.

For decades, Japan has had ultra-low interest rates. Big institutions and banks could borrow cheaply in yen, flip those yen into dollars, and buy higher-yielding assets abroad including U.S. bonds, stocks, credit, and, indirectly, crypto via funds and “risk baskets.” As long as Japanese rates stayed near zero and the yen stayed weak, this was like a levered yield farm on the entire global market.

That game is now changing.

Over the last year and a half, the Bank of Japan has been slowly exiting its emergency-level easy policy. It ended negative rates in 2024 and nudged policy up toward positive territory.  Today, BoJ Governor Kazuo Ueda went a step further and gave his clearest hint yet that rates could be hiked again at the December 18-19 meeting. After his remarks, Japan’s 2-year government bond yield hit ~1%, its highest level since 2008, and markets quickly repriced the odds of a hike to around 70-80%. 

That might sound like boring bond-nerd stuff, but it hits the yen carry trade right where it hurts:

• Higher Japanese rates mean borrowing in yen is no longer nearly free.

• A stronger yen (which we saw today as it became the best-performing major currency) makes those yen debts more expensive to repay in the future. 

If you’re a big macro fund or bank that’s been long all kinds of risk assets funded with cheap yen, this is your wake-up call. The rational move now is to derisk:

1. Sell some of the assets you bought with borrowed yen (U.S. equities, EM debt, credit, and “high beta” stuff like tech and crypto).

2. Use the cash to buy back yen and pay down the loans before the math turns against you.

Now imagine enough large players doing that at once and you get what we saw today: a risk-off flush where prices drop across the board, not because of idiosyncratic news, but because the funding leg of the trade is moving.

Crypto is now plugged into that system. Bitcoin isn’t just held by retail and a few OGs anymore; it sits on corporate balance sheets, inside ETFs, and in multi-asset portfolios managed by macro funds. When those desks de-risk, BTC is also in the basket to sell.

You can see it in the flows: November was Bitcoin’s second-worst month of 2025, with spot Bitcoin ETFs seeing roughly $3.4-3.5B in net outflows, the largest since launch. Some of today’s move was also amplified by liquidations with nearly $1B in levered crypto bets wiped out as prices fell.

So how should a crypto investor interpret this?

• This is a macro event, not a fundamental crisis. Blockchains didn’t break today. What broke was the illusion that Japan would be the world’s zero-rate sugar daddy forever.

• BoJ is now a key character in the crypto story. For years, everyone only watched the Fed. Going forward, BoJ policy—especially the pace of hikes and the strength of the yen—will matter for how much global leverage can sit comfortably in risk assets. 

• Unwinds are messy by design. When carry trades and high leverage reverse, the downside gets exaggerated. That doesn’t tell you where Bitcoin should be in 5-10 years, but it absolutely shapes the path of prices over the next few weeks and months.

What to Watch for the Rest of December

• Bank of Japan: words vs. actions

  The big one is whether BoJ actually follows through with more tightening or just keeps talking tough. Any surprise on the pace of hikes or hints about shrinking its balance sheet can re-ignite the “yen carry unwind → sell risk” loop.

• Yen and global “risk-on / risk-off” days

  Keep an eye on USD/JPY alongside BTC. A stronger yen + red equities + wider credit spreads is the classic “de-risking” combo. If you see that cocktail again, don’t be surprised if crypto catches more stray bullets even without crypto-native news.

• Leverage and liquidations in crypto

  Funding rates, open interest, and onchain leverage metrics will tell you whether the market has actually de-levered or is already piling back in. After a macro shock, the path is usually: forced sellers → reflexive bounce → test of whether the new longs are real or just fast money.

• Spot ETF and fund flows

  Inflows back into spot BTC/ETH products and listed crypto vehicles would be a sign that institutions are treating this as a macro event, not a structural break in the thesis. Continued outflows, on the other hand, would confirm a slower, more grinding de-risk.

• Typical year-end liquidity weirdness

  December often comes with thinner books as desks shut down, plus tax-loss harvesting and window dressing. That can amplify both downside shocks and face-ripping rallies. Don’t over-interpret every intraday move; focus on whether the bigger macro story (BoJ, global yields, dollar/yen) is stabilizing or not.

Net-net: the core crypto story hasn’t changed in a month, but the funding environment has, and that’s what will drive how choppy the last few weeks of the year feel.

🔗 Check out the full article.

In the news 🗞️

• Tokenized gold shines as crypto investors search for safety. While DeFi TVL has fallen from $177B in mid October to $118B today and BTC is down 24% this month, tokenized commodities have grown to a $3.63B market cap with 167,400 holders, led by gold backed tokens. Tether Gold and Paxos Gold now account for roughly $3B combined, reflecting a growing preference for on chain exposure to the classic safe haven as spot gold trades above $4,200 per ounce.

• Yearn’s yETH vault hit by complex $9M exploit. The veteran yield aggregator suffered an attack that let an attacker mint “infinite yETH,” drain roughly $9M from yETH pools on Curve, then route at least 1,000 ETH through Tornado Cash before the team helped recover about $2.4M in pxETH. Yearn says the issue stemmed from a combination of a low level numerical bug and high level invariant problem in custom code used only by yETH, marking the third direct hack of a Yearn product since 2021 while more than $570M remains deposited across its vaults.

• DeFi TVL drop masks steady growth under the hood. Since early October headline TVL has fallen 30.9% from $178B to $123B while ETH and major DeFi tokens like AAVE and LDO are down 38 to 50%, but most of that move comes from price depreciation rather than capital exiting the system. Onchain activity remains solid, with DEX volumes hitting $360B in trades in November and Aave TVL at $32B nearly double last year, pointing to a slower more mature uptrend instead of a boom bust repeat of 2021.

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