Bitcoin has serious competition for the biggest loser of 2023

As cryptocurrency billionaires count their epic losses, the Bank of Japan effectively declares “hold my beer.”

Forbes‘ latest annual world billionaires list is tough reading for people betting that Bitcoin and other crypto-assets are solid investments. Between sliding values, government lawsuits, the specter of regulatory action and too many fraud allegations to list, the biggest players in this fragile industry lost a combined $110 billion last year.

Still, those declines could accelerate as the institution destined for even bigger losses pulls another Jenga piece out of the crypto world. We are of course talking about the Bank of Japan, which this week is under new management.

If you think you’re in for a tough year on the job, consider Kazuo Ueda when he arrives on the job as the new BOJ governor. It’s hard to think of a more impossible gig than planning an exit from 23 years of quantitative easing. And without crashing Asia’s second largest economy.

Ueda’s predecessor, Haruhiko Kuroda, could have helped telegraph an unwinding of the roughly $3.4 trillion of asset purchases he has led since April 2013. Or at least offer a range of options for how the BOJ’s $5 trillion balance sheet, a larger than Japan’s annual gross domestic product may be reduced. Kuroda replied.

Sure, Kuroda tiptoed up to the line on Dec. 20, when the BOJ allowed 10-year yields to rise as high as 0.5%. He quickly withdrew as global markets plunged thanks to a soaring yen. The BOJ spent the next few weeks buying up more bonds and stocks to stem the mini-panic.

It is now up to Ueda to pick up the pieces and strategize ways to denationalize Japan’s bond and stock markets. Still, Ueda has 28 trillion reasons to tread carefully. That’s how much the BOJ could lose in yen terms if Japanese government bond yields rise by 1%. In dollars, we’re talking $211 billion, almost twice as much as crypto billionaires lost.

That estimate by Deputy Governor Masayoshi Amamiya at a parliamentary session last December may explain why he declined to take over as BOJ chairman. Amamiya had long been Prime Minister Fumio Kishida’s first choice to take over from Kuroda. He declined, probably because he didn’t want to be left with the BOJ’s $5 trillion bag.

One reason Amamiya made an inspired call: the 8.8 trillion yen ($67 billion) in unrealized losses on government bonds that the BOJ suffered in 2022. The losses were about 10 times larger than at the end of September. The amplitude of this increase in just a few months shows how quickly the BOJ’s balance sheet can go wrong in today’s global climate.

This potential financial carnage, should Ueda unleash it, would boomerang back Bitcoin’s way. During the past 20 plus years of zero interest rates, Japan became the leading creditor nation. Investors of all stripes have gotten into the habit of borrowing cheaply in yen to finance bets on higher-yielding assets everywhere. This “yen carry” has sustained everything from Argentine debt to South African commodities to Indian real estate to the New Zealand dollar to—wait for it—the array of cryptocurrencies.

It therefore follows that when yen or JGB rates shoot higher, the floor falls out from submarkets across the globe. That’s also true of crypto assets, which don’t tend to do well when investors in Asia and beyond swing back toward “risk off” squats.

When markets fluctuate, investors make quick decisions about which assets pass. The 19 Crypto Billionaires Who Forbes track in this regard saw their collective fortunes plunge from $140 billion to less than $30 billion as of March 10, 2023. Ten of these crypto-enthusiasts exited the billionaires list altogether.

That was, of course, before Silicon Valley Bank collapsed and UBS Group rescued Credit Suisse from oblivion. While mismanagement is certainly a factor, the economic chaos of recent months bears the fingerprints of Federal Reserve officials.

Is the BOJ about to increase these burdens by “tapering” or tightening? Only Ueda knows. But suffice it to say that any bold move to shrink the BOJ’s balance sheet will roil global markets, increase the central bank’s loss figure exponentially and send high-risk assets sharply lower in favor of more conventional and liquid ones.

Of course, the cryptoworld is doing a hell of a job damaging credibility on its own. Look no further than the debacle at Sam Bankman-Fried’s FTX exchange, the hacking problems at Wormhole, Axie Infinity, Beanstalk Farms and elsewhere, and Binance’s meeting with the US Commodities and Futures Trading Commission. Nor do reports that North Korea’s new economic model is stealing crypto assets help Bitcoin’s cause.

Still, the loss of the BOJ as the globe’s 24/7 ATM — and top monetary bartender — will hit cryptocurrencies as hard as any other market. If not even more difficult.