When it comes to the global market selloff battering Bitcoin’s price on Monday, a focus has emerged on whether traders that borrowed the Japanese yen are this rout’s culprit.

The yen’s value has strengthened 10% against the U.S. dollar within the past month, according to TradingView data. Meanwhile, the price of Bitcoin has fallen 20% in the past week, dipping below $50,000 on Monday for the first time since February.

A so-called carry trade is rapidly being unwound, Jake Ostrovskis, an OTC Trader at the market maker Wintermute told Decrypt. The popular trade involves borrowing the yen at “historically low interest rates to invest in higher-yielding assets elsewhere,” he said.

If the yen’s value falls or stays low, traders are able to make a profit simply by holding assets denominated in other currencies, such as the dollar. On top of that, the returns can be juiced by yields or investing those converted funds into other assets.

Last week, The Bank of Japan (BOJ) raised interest rates for the first time in 17 years, however, which increased yen borrowing costs. Signaling more rate hikes are “in the pipeline,” the BOJ’s move made a yen-based carry trade “unattractive,” Ostrovskis said.

“As they sell risk assets and convert back to yen, the yen has strengthened,” Ostrovskis explained, adding that “risk assets like equities, and cryptocurrencies have experienced increased volatility and downward pressure” as a result of those positions being closed.

As traders buy up the yen to close out their positions, it can also result in more pain for other yen borrowers. John Wu, an investor at the VC firm Asylum Ventures, described the dynamic on Twitter (aka X) as a “double-whammy” causing cascading liquidations.

The rush for the exit has been immense, Amberdata Director of Derivatives Greg Magadini told Decrypt. “Everyone was leaning the same way,” he said, adding that the yen-carry-trade is “a crowded [one] because it's such an obvious trade.”

However, the breakdown of the carry trade is one of several market-moving factors currently at play, Magadini said. U.S. recession fears sparked by weaker-than-expected job growth and flaring geopolitical tensions in the Middle East are also causing investors to adopt a risk-off approach toward short-term, he added.

“Everything went haywire at once,” Magadini said, noting that crypto, gold, and tech stocks have all wavered recently. “The Japanese yen is a canary in the coal mine.”

While liquidations stemming from the yen-carry-trade are compounding pain in markets, a wider view of headwinds was echoed by Bartosz Lipinski, CEO of Cube.Exchange.

“Previously, one could borrow yen virtually for free and use it to express opinions in the market across a variety of assets,” he told Decrypt. “Uncertainty in the Middle East, [...] as well as a potential recession in the U.S., is leading many traders to go risk-off.”

Edited by Andrew Hayward