Chart of the Week | Bitcoin vs Volatility

Good morning everyone and welcome to our Chart of the Week series! Every week we provide you with one of the most informative Bitcoin charts, sent directly to your inbox. This week we dive into Bitcoin’s volatility compared with the rest of the market.

The Wildest Week in Markets - Explained

We think it is safe to say that the past week has been one of the most incredible weeks in markets in a long, long time. We saw an avalanche of news and absolutely wild moves in almost every asset class, worldwide. The dollar, the stock market, oil, US Treasury bonds- all making huge moves. Here’s our best summary of what to make of it, and what it indicates as to where we are headed next.

US Treasury Bonds

We think the most notable and most important moves have been in the bond market. Remember that a US Treasury Bond is basically a fancy IOU that pays interest. The government gets your cash, and you get a promise for them to repay you after a certain time period, with interest.

Those interest rates move inversely to the value of the bond. As bonds are bought up by the market and the value of the underlying bond rises, the yield will fall and likewise, as bonds get sold, the yield will increase. Generally speaking, the yield should approximate the nominal growth expectations for that country. If real growth is 1% and inflation is 1%, you should expect a yield of ~2%.

Of course, it’s not just growth + inflation as there are a variety of other factors to consider. One such factor is the risk of increasing inflation over the lifetime of the bond, and this is obviously a more important factor, the longer the duration of the bond (aka ‘term premium’). Another such factor that influences the value of bonds is the principle of supply and demand, no different from any other market.

Over the past week, we saw absolutely huge moves down in US Treasury bonds, and therefore, a monumental increase in yields. The 10yr treasury bond yield rose over 60bps (0.60%), which is one of the largest weekly increases we’ve seen in many years. The most critical part of it, is that the dramatic rise in yield, is occurring as we enter one of the worst growth environments we’ve seen since COVID. Rates should have fallen, not risen.

Clearly, the supply of bonds was overwhelming demand. Also, we know from inflation swaps (instruments that track the market expectation for inflation) that the market was not concerned with inflation. In fact, as noted previously, these swaps were indicating significant disinflation caused by huge negative growth shocks from the highest tariffs in 100yrs. This was confirmed by oil, which moved sharply lower on the week, pricing in deteriorating global growth.

What this indicates, is that investors are demanding a much, much higher premium to hold long duration bonds, which we believe is due in large part, to the fiscal concerns we’ve been noting.

The Dollar

The dollar fell sharply during the week, losing over 3% of its value (which is a massive move in currencies). Similar to bonds, this is the exact opposite of what is normally seen going into a recession/growth scare. Instead of the dollar serving as a safe haven, where global capital rushes to buy dollars (and dollar-based assets like US Treasuries), the dollar actually sold off sharply. This is also not what would be expected from a country announcing tariffs- usually, the country imposing the tariffs sees a strengthening of their currency.

Remember, if you are a foreign business/individual/bank, you don’t buy paper dollars. In the context of ‘the dollar’ (as a reserve currency), generally speaking, this refers to dollar-denominated assets, like US Treasuries. If you’re a European, you sell your Euros, buy dollars, then use those dollars to buy US Treasury bonds.

The opposite is also true- if you are a European and you no longer want to be in ‘the dollar’, you would sell your US Treasuries, leaving you with dollars, which you then sell to buy Euros. If global capital was fleeing the dollar, this would cause downward pressure in the value of the bonds and downward pressure in the dollar itself- and this is exactly what we saw.

If Not the Dollar, Then What?

We know that both the dollar and dollar-based treasury bonds sold off sharply, indicating significant capital flight- a dynamic we’ve been noting since early March. However, the difference is that over this past week, the moves down in Treasuries and the dollar were some of the largest that we’ve seen in many years, not minor 10-20bps moves as we’ve seen in March. All of the hallmarks of a balance of payments crisis seem to be present- normally reserved for emerging market economies.

For context, here is a chart that shows the prior period of capital rotation we had noted in early March. On the right, we see how much larger the move in Treasuries was over the past week.

Foreign capital was clearly fleeing the dollar en masse, as we warned in January would likely occur. So, where did it go? The Swiss Franc (up 5.2%), the Japanese Yen (up 2.3%), gold (up 6.5%) and, possibly, into bitcoin (up 6.5%).

It’s important to note that, while a 2%-6% move in bitcoin doesn’t feel very notable, the moves in the Franc, Yen and gold are absolutely notable. We’ve long noted the correlation that bitcoin has to the Nasdaq, which did have a week of solid performance. So, it is possible that the move up in bitcoin represents more of that Nasdaq correlation, than foreign capital rotation but we still believe that over time, bitcoin will attract some of these foreign reserves.

Treasury Market Dysfunction

It is also worth noting that, in addition to the foreign capital rotation out of the dollar and dollar-based assets like Treasuries, we also likely saw an unwind of the “basis trade”. The basis trade was a trade in which hedge funds would purchase treasuries, then take those treasuries and pledge them as collateral and use the proceeds to short Treasury bond futures. There is a very small spread that can be made by doing this (2-5 basis points), so these hedge funds were levered up as much as 70x in this trade. When the value of the collateral (treasuries) fell, this caused margin calls and forced liquidations.

There is a measure of volatility for the treasury market, called the MOVE index. This is basically a “VIX” for the bond market, and we can see that this past week had very high volatility readings. It’s important to note that Treasury bonds are the collateral for the entire global financial system, and volatility in the underlying collateral can have enormous consequences.

Where Next?

Global capital is clearly rotating out of the dollar (and dollar denominated Treasuries), at an accelerating pace. The treasury market is experiencing significant volatility, at one point intraday last week, hitting a level on the MOVE that was the 3^rd highest on record.

If rates continue to move higher, the Fed might be forced to increase the size of their balance sheet. We believe that talk of a Fed cut is misplaced, as long end yields would likely increase with a Fed cut, and we think the Fed knows this.

This leaves an expansion of the balance sheet as the most likely intervention, which we know is very bullish for scarce assets like bitcoin. Add in another fundamental driver for bitcoin, the fleeing of the dollar due to tariffs, uncertainty and fiscal concerns, and neutral store of value assets like bitcoin emerge as very likely alternatives.

That’s it for this weeks edition, remember to stay humble and stack sats!