When Crypto Market Crashing Meets Geopolitical Tensions: Why January's Selloff Signals Deeper Shifts

The crypto market crashing became front-page news in late January when the intersection of policy decisions from Tokyo to Washington sent shockwaves across digital assets. Bitcoin plummeted while the broader market capitalization contracted to $3.08 trillion, marking a significant correction as investors reassessed their exposure to risk assets amid mounting uncertainty. Multiple headwinds converged during this period—from Japan’s hawkish signals to escalating trade tensions—creating a perfect storm that tested investor conviction in the crypto space. Understanding these interconnected factors reveals how traditional macroeconomic forces continue to shape cryptocurrency valuations.

The Yen’s Rise Triggering Carry Trade Unwind

The primary catalyst for the crypto market crashing centered on Japan’s monetary policy trajectory. Japanese government bonds surged to multi-year highs as the Bank of Japan signaled its intent to maintain an aggressive hiking cycle throughout 2026. Citigroup analysts projected three rate hikes this year, potentially pushing the headline rate to 1.50%—the highest level in decades. This shift has profound implications for risk assets globally.

Here’s why this matters for cryptocurrency: The unwinding of the carry trade represents the core vulnerability. Carry trade involves borrowing funds in low-interest-rate environments (like Japan had) and deploying capital into higher-yielding assets, including crypto and other speculative positions. When rates in the originating country rise sharply, these trades become unprofitable, forcing liquidations across risk assets simultaneously. Bitcoin dropped from its year-to-date high of $98,000 to $90,000 during this period, while Ethereum fell approximately 4% toward the $3,000 level. Other major tokens including Solana, Dogecoin, and Monero declined by more than 3% each.

The carry trade unwinding effect cascaded through markets because it wasn’t just affecting crypto—it was a global repricing event affecting equities, commodities, and other risk assets that had benefited from years of cheap yen funding.

Trump’s Tariff Threats Shaking Risk Appetite

Compounding the crypto market crashing momentum was an unexpected geopolitical escalation. President Trump announced sweeping tariffs targeting key U.S. allies including the United Kingdom, Norway, Sweden, and Denmark. These trade tensions emerged from Trump’s controversial statements about acquiring Greenland for the United States, accompanied by social media barbs directed at French President Emmanuel Macron and British leadership.

The escalation raised alarm bells across markets: The European Union threatened reciprocal tariffs valued at €93 billion on U.S. imports, signaling the potential for a full-scale trade war. This prospect alone was sufficient to trigger risk-off positioning across multiple asset classes. Cryptocurrencies, as highly correlated risk assets, bore the brunt of this sentiment shift. Traders reduced exposure to speculative positions, with Bitcoin bearing particular selling pressure as investors sought safer harbor.

The Supreme Court was expected to rule on the legality of these tariffs within days, adding uncertainty to the situation. Polymarket traders were betting against Trump’s position, though forecasters acknowledged that clarity from either ruling outcome remained unlikely—keeping the risk premium elevated.

Futures Market Weakness Signals Fading Investor Conviction

Adding another layer to the crypto market crashing narrative was deteriorating technical positioning in derivatives markets. According to CoinGlass data, futures open interest dropped sharply to $136 billion from this month’s high of $146 billion. This decline signals weakening demand from professional traders and institutional players in the leveraged derivatives segment.

Open interest declines typically precede or accompany downward price action because they reflect reducing position sizes and fading confidence. When investors liquidate futures positions, it accelerates selling momentum in spot markets. The combination of forced liquidations and voluntary position reductions created a negative feedback loop—exactly what manifested across the broader crypto market during this correction phase.

From Crash to Recovery: What’s Next for Crypto?

Notably, market conditions have shifted significantly since the January selloff. Current data from February 7, 2026 shows Bitcoin trading at $70.73K, representing a recovery trajectory despite being below the pre-correction levels. More importantly, the directional shift is decisively positive: Bitcoin posted a +9.75% gain over the prior 24 hours, while Ethereum rebounded +9.56%. Solana demonstrated particular strength with a +15.23% surge, and even Dogecoin participated in the recovery with a +10.60% advance.

This reversal suggests that while crypto market crashing episodes can be violent and multi-causal, the underlying demand for digital assets persists once the immediate crisis catalysts stabilize or resolve. The recovery reinforces that the January decline, though sharp, constituted a correction within a longer-term uptrend rather than a fundamental reversal in market structure.

For investors monitoring this space, the lesson is clear: macro shocks trigger crypto volatility, but the underlying fundamentals of blockchain adoption and institutional participation remain intact. The intersection of Japanese monetary policy, trade tensions, and derivatives positioning created a perfect storm—but storms pass. The subsequent recovery underscores that crypto market crashing moments, while painful in real-time, often create opportunity for those with sufficient conviction and dry powder.