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Japan-Update

Cryptocurrency crash ripples through Tokyo stocks

Traders may be unloading shares to cover losses and prepare for taxes

Bitcoin has shed much of its value since peaking in December.   © AP

TOKYO -- This week's plunge in cryptocurrency prices appears to have prompted sell-offs in some corners of Japan's equity market as squeezed investors seek quick cash, a trend that could accelerate as tax season approaches.

Cryptocurrency exchange operator GMO Internet tumbled nearly 5% Friday and gave up 1% over the four sessions through that day, after soaring 35% from the start of 2017 through Monday. Ceres, which invests in Tokyo-based crypto exchange Bitbank, retreated 18% over the four-day period, while SBI Holdings, a shareholder in the company behind virtual currency ripple, lost 4%. The two Japanese stocks had been up 48% and 78%, respectively, since the start of 2017.

"There's concern that funds won't be recovered from retail investors who suffered losses on leveraged trades, which would put pressure on profits," said Nobuyuki Fujimoto of Zaisan Net, a Tokyo-based startup providing financial information.

The impact extends beyond stocks with direct crypto connections. Much of the appeal of digital currencies lies in their volatility, which is also what draws retail investors to foreign exchange trading, for example. Online brokerage kabu.com Securities also notes investor overlap in such areas as biotechnology and gaming stocks.

Investors flush with cash from the virtual-currency rally put some of their newfound wealth into stocks. This created a virtuous cycle that boosted the Tokyo Stock Exchange's startup-heavy Mothers index. But the recent crash cut into these traders' funds, raising the prospect of the trend going into reverse. That the Mothers index retreated for four straight sessions through Friday suggests that this is already happening.

Some traders see the crypto selloff as a chance to get in. "I sold stocks like [online game developer and publisher] Brangista to buy cryptocurrencies such as ethereurm on the dip," said a 30-year-old in Kanagawa Prefecture near Tokyo.

Market watchers are also taking note of correlations involving cryptocurrencies in overseas stock markets. Masao Muraki at Deutsche Securities has observed a connection between bitcoin and the CBOE Volatility Index, or VIX, two indicators that at first seem to bear little relation to each other.

The VIX -- also known as the "fear gauge" in the U.S. stock market -- spiked 15% on Tuesday, a day when bitcoin plunged. Conversely, the index fell Jan. 2 while bitcoin gained more than 10%. This points to an inverse relationship that reflects investor risk tolerance.

"More institutional investors are paying attention to cryptocurrency prices," Muraki said.

The period from mid-February into March will bring another source of turmoil to the Japanese market: tax season. Investors that realized more than 200,000 yen ($1,800) in capital gains from cryptocurrency trading last year are required to declare the income on their tax returns. Many individual investors are likely to fit the bill, given the surge in bitcoin and its ilk.

Investors that reinvested their gains and now have too little cash on hand to meet their tax obligations will need to liquidate some holdings to make up the difference. The question is what they will sell.

Many will likely find it easier to part with stocks. Losses on shares can be carried forward to offset future gains, unlike losses in the "miscellaneous income" category, which includes cryptocurrencies.

There may be more liquidation than usual to deal with taxes this year, said kabu.com Securities.

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