Japan just broke the bond market; again

The monetary order is breaking down

That isn't just a headline; it was the sentiment echoing from Davos this week, specifically from Ray Dalio. I am currently traveling, but the markets do not sleep, and neither does the volatility. The dominant narrative this week wasn't crypto, it was the stress in the Japanese bond market. When the bedrock of the global financial system shakes, risk assets like crypto catch a cold.

We are seeing a massive liquidity drain, geopolitical tensions over Greenland and Iran, and a crypto market that feels like zombie land with retail completely absent. Gold is stealing the mindshare right now. But here is the reality: Volatility is the price of admission for sovereignty. While the tourists panic, the long-term holders are quietly accumulating. Let’s look at the data.

The Macro Lens 🏦

The global financial system is currently fragile. We are seeing a convergence of liquidity tightening and sovereign debt instability.

The US Treasury General Account (TGA) grew by $90B last week. When the TGA grows, it sucks liquidity out of the financial system to pay the government's bills. With tax season approaching, expect this liquidity drain to continue.

The Japanese bond market faced a chaotic selloff, with 30-year yields jumping 25+ basis points. This forced the Fed and the Bank of Japan to intervene. Why does this matter? If Japan raises rates to save the Yen, the Yen Carry Trade unwinds, forcing the sale of US assets. We are not out of the woods yet.

The Fed expanded its balance sheet by a negligible $3B last week, effectively neutral. While the ECB kept reducing their Balance sheet, meaning tightening of financial conditions. Meanwhile, the market is pricing in zero rate cuts for the upcoming FOMC meeting in two days.

Ray Dalio noted at Davos that fiat currencies and debt are no longer being held by central banks in the same way. The structural demand for government debt is failing.

The Digital Frontier ₿

The crypto market is currently in a state of Extreme Fear, but on-chain data suggests a divergence between price action and smart money behavior.

Sentiment & Valuation: The Fear & Greed Index has crashed to 20 (Extreme Fear). However, logarithmic regression model shows the market is 37% undervalued, with a fair value of $4.75T vs. the current $2.99T.

We saw the largest outflows since mid-November. Digital asset investment products recorded $1.73B in outflows last week. Bitcoin bled $1.32B and Ethereum lost $600M. While the majors bled, Solana investment products saw inflows of $17.1M, bucking the negative trend.

Despite the price drop, Long Term Holders (LTH) and addresses with 100+ BTC are accumulating again. Short Term Holders (STH) are distributing at a loss. Historically, this transfer from weak hands to strong hands is a signal of a bottoming formation.

Bitcoin’s RSI dropped 17.3%, signaling lost momentum. Realized losses are currently outweighing profits, suggesting we are in a capitulation phase.

The Freedom Capital Take

Verdict: Risk-Off / Defensive.

We are synthesizing the macro chaos in Japan with the technical breakdown in Crypto. The correlation is clear: when global liquidity tightens (TGA up) and bond yields spike (Japan), crypto suffers. The Altcoin Season index is sitting at 41, and the Russell 2000 (small caps) correlation suggests we should see a rally, but crypto liquidity is non-existent.

We are currently seeing a rotation from growth to value in equities, and a rotation from crypto to gold in alternative assets. Until the precious metals market cools off and consolidates, we do not expect a massive influx of capital back into Bitcoin. We are patient.

Inside the Portfolio 🔒

The following insights are from our active Portfolio Strategies.

Given the macro headwinds and the zombie state of the altcoin market, we have made a decisive shift in our strategy this week.

We are cutting the dead weight: We have exited positions in illiquid altcoins. The risk/reward for holding these assets in a liquidity-draining environment does not justify the exposure.
We are hedging the majors: We are maintaining our core Bitcoin position but have deployed a specific hedging strategy to protect against further downside volatility.
Dry Powder: We are sitting on a higher percentage of cash to deploy tactically when the Extreme Fear capitulation wick hits.

Want to know exactly which assets we sold and the specific hedge we opened?

[Upgrade to our Portfolio strategies to Unlock the Full Portfolio positioning]

The Sovereign Tip

Cash is a Position.

In a market dominated by Extreme Fear and massive outflows, the urge to do something usually leads to losses. Novice investors think they must always be fully invested. Sovereign investors understand that holding cash (or stablecoins) during high-volatility regimes is an active investment decision. It preserves your capital so you can be the liquidity provider when everyone else is forced to sell.

That’s a wrap. I hope you found it valuable.

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Disclaimer: Freedom Capital DA provides educational content and market research only. This is not financial, legal, or tax advice. We do not take into account your personal financial situation. Investing in digital assets involves high risk. Always consult with a licensed professional before making financial decisions.

Disclosure: I hold some of the assets mentioned in this newsletter.