Why does Bitcoin lead the way as the central bank raises interest rates and reshapes the gold-dollar relationship?

The fluctuations in the digital asset market no longer follow traditional cryptocurrency logic. A recent downturn has prompted investors to reconsider a key question: has the composition of Bitcoin holders changed, and has its role in the global financial system also shifted? The subtle changes in the gold-dollar relationship are profoundly influencing Bitcoin’s price trajectory.

Arbitrage Trading Chain: From Yen to USD to Bitcoin

To understand why Bitcoin is so sensitive to macro events, we first need to look at how the Bank of Japan’s rate hikes have stirred global liquidity.

For a long time, Japan’s interest rates have been near zero or even negative, creating an excellent arbitrage space for global hedge funds and asset management firms. Borrowing yen at minimal cost, then converting it into dollars to invest in higher-yield assets—ranging from U.S. Treasuries to equities and cryptocurrencies. As long as these assets’ returns exceed the cost of yen borrowing, the interest rate differential becomes pure profit.

The scale of this strategy is difficult to estimate precisely, but a conservative estimate involves hundreds of billions of dollars. Including derivatives exposure, some analysts believe the total could reach trillions of dollars. Meanwhile, Japan, as the largest overseas holder of U.S. Treasuries with over $1 trillion, means that shifts in Japanese capital flows can directly impact the world’s most important bond market, transmitting effects to the pricing of all risk assets.

When the central bank announces rate hikes, the game that has been running for decades is shaken. The cost of borrowing yen rises, narrowing arbitrage opportunities; more critically, rate hike expectations will push the yen higher. These institutions initially borrowed yen to buy dollars for investment—now, to repay debt, they must sell dollar assets and buy yen. The stronger the yen, the larger the scale of assets they need to unwind.

This forced liquidation does not discriminate by asset type or timing. They sell whatever is most liquid and easiest to liquidate. Bitcoin’s 24-hour trading and lack of daily price limits become disadvantages—often, it is the one hammered the hardest.

Historical data confirms this pattern. On July 31, 2024, after the Bank of Japan announced a rate hike to 0.25%, the yen appreciated over 20% against the dollar. Bitcoin then dropped from around $65,000 to about $50,000 within a week, a decline of approximately 23%, evaporating $60 billion in market value across the crypto market. On-chain analysts have observed that after the last three rate hikes by the Bank of Japan, Bitcoin’s retracement exceeded 20%.

While the specific start and end points vary, the overall direction is highly consistent: whenever Japan tightens monetary policy, Bitcoin tends to be the hardest hit.

Gold and Bitcoin: Risk Assets Redefined by the Gold-Dollar Relationship

But there’s a deeper question: why is Bitcoin always the first to be hammered, rather than gold?

The superficial reason is Bitcoin’s liquidity and 24-hour trading, but the real reason is more complex. Over the past two years, Bitcoin has been re-priced. It has shifted from an independent “alternative asset” outside traditional finance to being integrated into Wall Street’s risk exposure framework.

In January 2024, the U.S. SEC approved a spot Bitcoin ETF, a milestone that crypto industry has awaited for a decade. Giants like BlackRock and Fidelity, managing trillions, can now legally include Bitcoin in client portfolios. Capital indeed flowed in as expected, but this also brought a fundamental change in holder composition.

Previously, Bitcoin was mainly held by crypto-native players, retail investors, and some aggressive family offices. Now, it is being bought by pension funds, hedge funds, and asset allocation models. These institutions hold stocks, bonds, and gold simultaneously—they manage “risk budgets.” When they need to reduce overall risk exposure, they do not sell only Bitcoin or only stocks but scale down their entire portfolio proportionally.

Data clearly reflects this close linkage. In early 2025, the 30-day rolling correlation between Bitcoin and the Nasdaq 100 reached 0.80, the highest since 2022. By contrast, before 2020, this correlation fluctuated between -0.2 and 0.2, essentially indicating two unrelated assets.

More importantly, this correlation tends to spike during market stress. Whenever risk aversion rises—such as during the March 2020 pandemic crash, the Fed’s aggressive rate hikes in 2022, or the early 2025 tariff concerns—the linkage between Bitcoin and U.S. stocks intensifies. Institutions in panic do not distinguish between “cryptocurrencies” or “tech stocks”; they look at one label: risk exposure.

This directly challenges the “digital gold” narrative. Gold, as a traditional hedge against inflation and fiat devaluation, has shown a stark divergence from Bitcoin. Over the past year, gold has gained over 60%, its best performance since 1979; meanwhile, Bitcoin retraced over 30% from its highs. Both are called hedging assets, yet in the same macro environment, they have charted completely opposite paths.

This is not to say Bitcoin’s long-term value is in question. Its five-year compound annual return still far exceeds the S&P 500 and Nasdaq. But in the current phase, its short-term pricing logic has changed: it is now a high-volatility, high-beta risk asset, not a safe haven. The changes in the gold-dollar relationship directly influence market risk appetite, making Bitcoin the first asset to be adjusted.

The Reallocation of Risks in the Institutional Era

Understanding this is key to grasping why a 25 basis point rate hike by the Bank of Japan can cause Bitcoin to swing by thousands of dollars in a short period. It’s not because Japanese investors are selling Bitcoin; rather, when global liquidity tightens, institutions reduce all risk exposures using the same logic.

Bitcoin’s position in this financial transmission chain is precisely the link with the greatest volatility and easiest liquidity. When rate hike expectations push the dollar higher, and when tightening expectations spread, Bitcoin, along with other risk assets, is unwound simultaneously. This is an inevitable result of the changing gold-dollar relationship.

Historically, Bitcoin tends to bottom within one to two weeks after a central bank rate decision, then consolidate or rebound. This pattern exists because the market needs time to reprice all risk exposures. After brief panic-driven liquidations, value investors reassess the assets that were “wrongly sold,” often creating opportunities for strategic positioning.

The Cost of Institutionalization and Future Uncertainty

Connecting the dots, the causal chain is quite clear: Federal Reserve rate hikes → forced unwinding of arbitrage positions → tightening global liquidity → institutions reducing risk budgets → Bitcoin, as a high-beta asset, is sold first.

Bitcoin itself has done nothing wrong in this chain. It is simply placed at a position beyond control—the end of the global macro liquidity transmission chain. The fluctuations in the gold-dollar relationship directly determine institutional risk appetite, thereby rewriting Bitcoin’s fate.

This is the new normal in the ETF era. Before 2024, Bitcoin’s price movements were mainly driven by crypto-native factors: halving cycles, on-chain data, exchange dynamics, regulatory news. During that period, its correlation with stocks and bonds was very low, making it somewhat like an “independent asset class.” After 2024, Wall Street arrived.

Bitcoin has been integrated into the same risk management framework as stocks and bonds. Its holder structure has changed, and so has its pricing logic. Its market cap has surged to $1.7 trillion, but at the cost of losing immunity to macro events. A single statement from the Fed or a decision by the Bank of Japan can cause it to fluctuate over 5% within hours.

If you believe in the “digital gold” narrative, that it can provide shelter in turbulent times, the current market performance is somewhat disappointing. At least for now, the market does not price it as a safe haven. The changes in the gold-dollar relationship tell us that risk appetite is the fundamental factor driving Bitcoin’s performance.

Perhaps this is just a temporary dislocation. Perhaps institutionalization is still in its early stages, and once allocation proportions stabilize, Bitcoin will find its rhythm again. Maybe the next halving cycle will once again demonstrate the dominance of crypto-native factors. But until then, if you hold Bitcoin, you need to accept a reality: you are also exposed to global liquidity risks. An event in a conference room in Tokyo might influence your account balance more than any on-chain indicator next week.

This is the cost of institutionalization. Whether it is worth it, each person has their own answer.