Bitcoin’s (BTC) recent resilience amidst the Nasdaq’s volatility, driven by increasing tariff tensions, has stirred enthusiasm among traders about the cryptocurrency’s prospects as a safe haven asset.
Nevertheless, bulls should remain vigilant in the bond market, as dynamics reminiscent of the COVID crash in March 2020 could be re-emerging.
The Nasdaq, known for its tech-heavy composition and positive correlation with Bitcoin, has fallen by 11% since President Donald Trump announced reciprocal tariffs on 180 countries, escalating trade conflicts and provoking countermeasures from China.
Other U.S. indices and global markets have also suffered significant declines, alongside sharp drop-offs in risk-sensitive currencies such as the Australian dollar and a retreat in gold prices.
BTC has shown impressive stability, consistently trading above $80,000, and many see this fortitude as indicative of its growth into a macro hedge.
“The S&P 500 has declined by approximately 5% this week as investors brace for earnings headwinds influenced by trade issues. Bitcoin, on the other hand, has demonstrated remarkable resilience,” stated David Hernandez, a crypto investment specialist at 21Shares, in an email to CoinDesk. “After an initial dip below $82,000, it quickly bounced back, reinforcing its role as a macro hedge during periods of economic stress. Its relative strength could draw continued institutional investment if market volatility persists.”
The perception of stability could evolve into a self-fulfilling prophecy, securing BTC’s status as a haven asset for years to come, noted MacroScope on X.
Treasury basis trade risks
That said, significant downside volatility in the short term cannot be dismissed, especially as the “Treasury market basis trade” faces risks due to increased fluctuations in bond prices.
The basis trade involves highly leveraged hedge funds, reportedly using leverage ratios of 50-to-1, to capitalize on minor discrepancies between Treasury futures and securities. This strategy unraveled in mid-March 2020 when COVID-19 posed a serious threat to the global economy, causing a “dash for cash” that prompted investors to liquidate nearly every asset for dollar liquidity. On March 12, 2020, BTC plummeted nearly 40%.
“When market volatility surges, as it currently is, it exposes highly leveraged carry trades that are susceptible to significant market movements. The meltdown in the U.S. Treasury market in March 2020, which disrupted basis carry trades, serves as a recent cautionary tale. The risk of leveraged carry trade failures is substantial…” commented Robin Brooks, managing director and chief economist at the International Institute of Finance, in an email to CoinDesk.
This risk is tangible, given that the size of the basis trade as of the end of March was $1 trillion—double the figure in March 2020. The current positioning suggests that even a one basis point change in Treasury yields (which move inversely to prices) could trigger a $600 million shift in the value of their positions, according to ZeroHedge.
Thus, increasing volatility in Treasury yields could instigate a sell-off akin to that seen during COVID, leading to widespread liquidations of all assets, including Bitcoin, to secure cash.
The MOVE index, which indicates the options-derived expected 30-day volatility in the U.S. Treasury market, surged by 12% to 125.70 on Friday, marking the highest level since November 4, as reported by TradingView.
The seriousness of the situation is emphasized by a recent Brookings Institution paper, which advises the Federal Reserve to consider targeted interventions in the U.S. Treasury market, particularly for hedge funds involved in basis trading during periods of acute market stress.
We’ll observe how the week unfolds.
