Bitcoin’s price stability is under threat from a looming crisis in the $1 trillion Treasury basis trade, which could trigger a global dash for cash and lead to selling of all assets, including bitcoin.
Market volatility poses a significant risk to the $1 trillion Treasury basis trade, which could trigger a global dash for cash and lead to selling of all assets, including bitcoin. This phenomenon was observed in mid-March 2020 when the basis trade tallied $500 billion.
A treasury basis trade is a financial transaction that involves simultaneously buying and selling government securities with different maturities.
This type of trade aims to profit from the difference in interest rates between two markets, often the spot market and the futures market.
The basis trade allows investors to hedge against potential losses or gains in the value of their portfolios.
It requires precise execution and monitoring to minimize risk.
Bitcoin’s recent stability amid Nasdaq turmoil, driven by tariffs, has generated excitement among market participants regarding its potential as a haven asset. However, the bulls might want to keep an eye on the bond market, where dynamics that characterized the COVID crash of March 2020 may be emerging.
Bitcoin is a decentralized digital currency that allows for peer-to-peer transactions without the need for intermediaries.
Created in 2009 by an anonymous individual or group using the pseudonym Satoshi Nakamoto, bitcoin uses cryptography to secure and verify transactions.
As of 2022, there are over 18 million bitcoin wallets worldwide, with a total market capitalization of over $1 trillion.
Bitcoin's value has fluctuated significantly since its inception, but it remains one of the most widely used cryptocurrencies globally.
The basis trade involves highly leveraged hedge funds operating at leverage ratios of 50-to-1, exploiting minor price discrepancies between Treasury futures and securities. This trade blew up in mid-March 2020 due to coronavirus threatening the global economy, leading to a ‘dash for cash’ that saw investors sell almost every asset for dollar liquidity.
The risk of leveraged carry trade blowups is high, especially as market volatility spikes. The size of the basis trade as of March end was $1 trillion, double the tally in March 2020. A one basis point move in Treasury yields could lead to a $600 million shift in the value of their bets, according to ZeroHedge.
The gravity of the situation is underscored by a recent Brookings Institution paper advising the Federal Reserve to consider targeted interventions in the U.S. Treasury market, specifically supporting hedge funds engaged in basis trading during times of severe market stress.
The stability of bitcoin’s price amid Nasdaq turmoil suggests its potential as a haven asset. However, the risk of a potential blowup of the $1 trillion Treasury basis trade cannot be ruled out. The situation is being closely watched by market participants and experts alike, who are waiting to see how things unfold in the week ahead.
