Bitcoin’s (BTC) recent consistency amidst the chaotic surroundings of the Nasdaq—prompted by trade tariffs—has sparked considerable interest among investors who view the cryptocurrency as a potential safe-haven asset. However, bullish investors should closely monitor the bond market, as signs reminiscent of the dynamics witnessed during the COVID-19 crash of March 2020 may be reappearing.
The Nasdaq, a stock index prominently featuring technology stocks and historically correlated with bitcoin, has seen an 11% decline since the announcement of reciprocal tariffs by President Trump on 180 countries. This intensification of trade disputes has led to retaliatory measures from China and has negatively affected other U.S. indices, as well as global markets, leading to significant declines in high-risk currencies like the Australian dollar, alongside pullbacks in gold.
Bitcoin’s price has shown remarkable stability, holding above $80,000, and investors are interpreting its durability as a sign of its transformation into a macro hedge.
“The S&P 500 has dropped nearly 5% this week, as traders brace for earnings challenges linked to trade issues. In contrast, Bitcoin has displayed notable resilience. After a brief dip below $82,000, it quickly bounced back, reinforcing its role as a macro hedge during economic downturns. Should market volatility continue, its relative strength may draw more institutional investments,” stated a crypto investment expert via email.
This impression of stability could evolve into a self-reinforcing trend, further entrenching Bitcoin’s status as a haven asset for the foreseeable future.
### Risks in Treasury Basis Trades
Nonetheless, the prospect of sharp downward volatility in the short term remains, particularly as challenges in the “Treasury market basis trade” surface amid increased fluctuations in bond prices.
The basis trade involves highly leveraged hedge funds, with reports indicating leverage ratios as high as 50-to-1, aiming to capitalize on small pricing discrepancies between Treasury futures and securities. This strategy faced severe setbacks during mid-March 2020, as the COVID-19 pandemic threatened to disrupt the global economy, resulting in a “dash for cash” where investors liquidated nearly all assets for dollar liquidity. Notably, Bitcoin experienced a nearly 40% drop on March 12, 2020.
“When market volatility spikes as seen now, it exposes highly leveraged carry trades that are susceptible to significant market shifts. The upheaval in the U.S. Treasury market in March 2020 disrupted basis carry trades and serves as a cautionary tale. The risk of leveraged carry trades collapsing is considerable,” remarked an economic expert.
The risk is tangible, given that the scale of the basis trade at the end of March was around $1 trillion, double the amount recorded in March 2020. This positions such that a mere one basis point change in Treasury yields could trigger a $600 million shift in the value of these trades.
Hence, rising volatility in Treasury yields could provoke a sell-off reminiscent of the COVID crisis, affecting all assets, including Bitcoin.
As of Friday, the MOVE index, which indicates anticipated volatility over the next 30 days in the U.S. Treasury market, surged 12% to 125.70—a peak not seen since early November.
The significance of the current conditions is emphasized by a recent economic report, which suggests that the Federal Reserve should contemplate focused interventions in the U.S. Treasury market, particularly in supporting hedge funds engaging in basis trading during times of extreme market stress.
We will observe closely how the upcoming week unfolds.