The Bank of Japan’s December policy meeting is just around the corner, and this time it’s not a false alarm—the market-implied probability of a rate hike is approaching 80%. For the crypto market, this could be the most important macro variable to watch in the near term.

Let’s start with why the Bank of Japan’s moves matter. For over a decade, there’s been a massive global arbitrage game: borrow yen at near-zero interest rates, convert to USD or other currencies, and invest in high-yield assets—including crypto assets like BTC and ETH. How big is this trade? Trillions of dollars. But now, the rules of the game might be about to change.

What happens if Japan really does hike rates? Higher financing costs are one thing, but the real issue is that a stronger yen will send repayment costs soaring. At that point, these arbitrage funds will have no choice but to: sell crypto assets → convert to USD → exchange for yen to repay debt. It’s a one-way flow, with no room for buffers.

We’ve already seen previews of this last August and October. When Japan hiked rates in August, BTC suffered a memorable one-day plunge; October’s market volatility was even more dramatic, with 1.66 million accounts liquidated and $19.3 billion in liquidations. And those were just tentative rate hikes—what if this time the move is bigger?

The market will face triple pressure: first, liquidity tightening as abundant funds become scarce; second, leverage unwinding, as simultaneous moves in exchange rates and crypto prices trigger cascading liquidations; and finally, sentiment contagion—Japan, as one of the last major central banks to pivot toward tightening, will have its actions interpreted as a systemic signal, sparking institutional sell-offs.

That said, liquidity-driven downturns often create opportunities. If industry fundamentals remain intact, core asset valuations may actually be unfairly punished. Historically, these are the moments when smart money starts to position.

So here’s the question: will you reduce leverage early to avoid risk, or have funds ready to seize the low-point opportunity? The answer isn’t about what others choose—it depends on your own assessment of your risk tolerance.