Why Bitcoin faces a brutal liquidity trap because China’s $298B of US Treasuries are up for sale

China’s gradual retreat from US authorities debt is evolving from a quiet background development into an express risk-management sign, and Bitcoin merchants are watching the market for the subsequent domino.

The quick set off for this renewed anxiousness got here on Feb. 9 when Bloomberg reported that Chinese regulators had been urging business banks to restrict their publicity to US treasuries, citing focus threat and volatility.

This guideline instantly focuses consideration on the huge pool of US bonds held by Chinese establishments. Data from the State Administration of Foreign Exchange present Chinese lenders’ holdings of dollar-denominated bonds at roughly $298 billion as of September.

However, a important unknown and the supply of market jitters is precisely how a lot of that determine is allotted particularly to Treasuries versus different greenback debt.

Meanwhile, this regulatory strain on business lenders is not taking place in a vacuum. It compounds a year-long strategic retreat from US treasuries, already evident in Beijing’s official accounts.

The US Treasury’s “Major Foreign Holders” data present that mainland China’s official Treasury holdings fell to $682.6 billion in November 2025, the bottom stage up to now decade.

This continues a development that has accelerated over the previous 5 years, as China has aggressively reduced its dependence on the US financial market.

Essentially, the mixed image is stark: the bid from the East is drying up throughout each business and state channels.

For Bitcoin, the risk isn’t that China will single-handedly “break” the Treasury market. The US market is just too deep for that; with $28.86 trillion in marketable debt, China’s $682.6 billion represents simply 2.4% of the inventory.

However, the actual hazard is extra delicate: if lowered international participation forces US yields greater through the time period premium, it’ll tighten the very monetary situations that high-volatility belongings like crypto rely on.

The “time period premium” channel is the place issues get fascinating

On the day the headlines broke, the US 10-year yield hovered around 4.23%. While that stage is not inherently a disaster, the chance lies in the way it might rise.

An orderly repricing is manageable, however a disorderly spike brought on by a purchaser strike can set off speedy deleveraging throughout charges, equities, and crypto.

A 2025 financial bulletin from the Federal Reserve Bank of Kansas City affords a sobering evaluation of this state of affairs. It estimates that a one-standard-deviation liquidation amongst international traders might spike Treasury yields by 25 to 100 foundation factors.

Crucially, it notes that yields can rise even with out dramatic promoting, as merely a lowered urge for food for new issuance is sufficient to strain charges greater.

Moreover, a extra excessive tail-risk benchmark comes from a 2022 NBER working paper on stress episodes. The examine estimates that an “recognized” $100 billion sale by international officers might shock the 10-year yield by greater than 100 foundation factors on impression earlier than fading.

This is not a baseline forecast, but it surely serves as a reminder that in liquidity shocks, positioning dominates fundamentals.

Why Bitcoin cares: actual yields and monetary situations

Bitcoin has traded like a macro length asset for a lot of the post-2020 cycle.

In that regime, greater yields and tighter liquidity usually translate into weaker bids for speculative belongings, even when the catalyst begins in charges relatively than crypto.

So, the real-yield part is significant right here. With the US 10-year inflation-adjusted (TIPS) yield at roughly 1.89% on Feb. 5, the chance price of holding non-yielding belongings is rising.

However, the trap for bears is that broader monetary situations are not but screaming “disaster.” The Chicago Fed’s National Financial Conditions Index sat at -0.56 for the week ending Jan. 30, indicating situations stay looser than common.

This nuance is harmful: markets can tighten meaningfully from simple ranges with out tipping into systemic stress.

Unfortunately for crypto bulls, that intermediate tightening is usually sufficient to knock Bitcoin decrease with out triggering a Fed rescue.

Notably, Bitcoin’s recent price action confirms this sensitivity. Last week, the flagship digital asset briefly fell below $60,000 amid broad risk-off strikes, solely to rebound above $70,000 as markets stabilized.

By Feb. 9, Bitcoin is bouncing once more, proving it stays a high-beta gauge of international liquidity sentiment.

Four situations for merchants watching the China–yields–BTC suggestions loop

To perceive what comes subsequent, merchants are not simply taking a look at whether or not China sells, but in addition how the market absorbs these gross sales. The impression on Bitcoin relies upon solely on the pace of the transfer and the ensuing stress on greenback liquidity.

Here are the 4 key methods this dynamic is prone to play out within the months forward.

•  “Contained de-risking” (base case):

In this case, banks gradual their incremental shopping for, and China’s headline holdings drift decrease, principally by way of maturities and reallocation relatively than pressing promoting.

As a outcome, US yields grind greater by 10 to 30 foundation factors over time, largely by way of time period premium and the market’s want to soak up provide.

Here, Bitcoin faces a delicate headwind, however the dominant drivers stay US macro information and shifting expectations for the Federal Reserve.

• “Term premium reprices” (bearish macro regime):

If the market interprets China’s steering as a secular shift in international urge for food, yields might reprice into the Kansas City Fed’s 25–100 foundation level vary.

A transfer like that, particularly if actual yields lead, would probably tighten monetary situations sufficient to compress threat publicity and push crypto decrease by way of greater funding prices, lowered liquidity, and risk-parity-style deleveraging.

• “Disorderly liquidity shock” (tail threat):

A quick, politicized, or crowded exit, even when not led by China, can create outsized worth results.

The stress-episode framework linking a $100 billion foreign-official sale to a greater than 100-basis-point transfer on impression is the type of reference merchants cite when contemplating nonlinear outcomes.

In this state of affairs, Bitcoin could drop sharply first on forced selling, then rebound if policymakers deploy liquidity instruments.

• “The stablecoin twist” (underappreciated):

Ironically, as China steps again, crypto itself is stepping up.

DeFiLlama estimates the stablecoin market cap at round $307 billion, with Tether reporting $141 billion in publicity to US Treasuries and associated debt, roughly one-fifth of China’s place.

In truth, the agency lately revealed that it was one of the top 10 buyer of US Treasuries up to now yr.

If stablecoin provide stays resilient, crypto capital might primarily subsidize its personal existence by supporting invoice demand, although Bitcoin might nonetheless undergo if broader situations tighten.

The coverage backstop issue: when greater yields develop into BTC-positive once more

The final pivot level for the “yields up, Bitcoin down” correlation is market functioning.

If a yield spike turns into disorderly sufficient to threaten the Treasury market itself, the US has instruments prepared. An IMF working paper on Treasury buybacks argues that such operations can successfully restore order in pressured segments.

This is the reflexivity crypto merchants depend on: in a extreme bond-market occasion, a short-term Bitcoin crash is usually the precursor to a liquidity-driven rebound as soon as the backstops arrive.

For now, China’s $682.6 billion headline quantity is much less a “promote sign” and extra a barometer of fragility.

It reminds us that Treasury demand is changing into price-sensitive on the margin, and Bitcoin stays the cleanest real-time gauge of whether or not the market sees greater yields as a easy repricing, or the beginning of a tighter, extra harmful regime

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