Bitcoin Faces Volatility Threat From Possible ‘Basis Trade Blowup,’ a Familiar Trigger From the 2020 Crash

Bitcoin’s performance in the face of a brutal equity sell-off is earning it new praise as a macro hedge — but a looming threat in the traditional financial system may soon test that narrative.

Since President Donald Trump’s sweeping tariff announcement on Wednesday, the Nasdaq has plunged 11%, while broader markets and commodities like gold have also retreated. Bitcoin, in contrast, has stayed above $80,000, dropping only briefly below $82K before recovering.

“The relative strength of BTC in this climate is hard to ignore,” said David Hernandez of 21Shares. “It’s behaving like an asset that institutions want to hold during uncertainty.”

The CoinDesk 20 index also reflects this resilience, and some analysts believe BTC’s growing access via ETFs and institutional platforms is helping reinforce its stability. Online, chatter of bitcoin as a “U.S. isolation hedge” is gaining momentum.

But Warning Signs Are Flashing in Bonds

Beneath this calm surface, however, risks tied to the $1 trillion Treasury basis trade are intensifying. The strategy — where hedge funds exploit price gaps between Treasury bonds and futures using heavy leverage — played a major role in the 2020 COVID crash, and it’s now twice the size it was back then.

Leverage on these trades can reach 50-to-1, making them extremely vulnerable to swings in yields. Even a 1 basis point move can shift positions by hundreds of millions of dollars.

“This is a setup for forced liquidations,” warned Robin Brooks, Chief Economist at the IIF. “We’ve seen what happens when volatility spikes and highly leveraged trades are exposed.”

The MOVE index, which tracks bond market volatility, surged 12% on Friday to 125.70 — its highest since November 2024 — signaling rising fear in fixed income markets.

If the basis trade blows up, the rush for dollar liquidity could trigger a sell-off across risk assets — including bitcoin, regardless of how well it’s performed in recent days.

Fed Watch and Market Tension Ahead

A recent Brookings Institution paper is already advising the Federal Reserve to prepare targeted interventions in the Treasury market to prevent systemic shocks from basis trade dislocations.

For now, BTC looks stable. But with $1 trillion in fragile leverage sitting under the surface, the next market jolt could determine whether bitcoin’s haven story holds — or unravels under pressure.

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