Bitcoin’s fate entangled in China’s retreat from US bonds

China’s gradual retreat from US government debt is evolving from a quiet background trend into an explicit risk-management signal, and Bitcoin traders are watching the market for the next domino.

The immediate trigger for this renewed anxiety came on Feb. 9 when Bloomberg reported that Chinese regulators were urging commercial banks to limit their exposure to US treasuries, citing concentration risk and volatility.

This guideline immediately focuses attention on the massive pool of US bonds held by Chinese institutions. Data from the State Administration of Foreign Exchange show Chinese lenders’ holdings of dollar-denominated bonds at roughly $298 billion as of September.

However, a critical unknown and the source of market jitters is exactly how much of that figure is allocated specifically to Treasuries versus other dollar debt.

Meanwhile, this regulatory pressure on commercial lenders isn’t happening 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 show that mainland China’s official Treasury holdings fell to $682.6 billion in November 2025, the lowest level in the past decade.

This continues a trend that has accelerated over the past five years, as China has aggressively reduced its dependence on the US financial market.

Essentially, the combined picture is stark: the bid from the East is drying up across both commercial and state channels.

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

However, the real danger is more subtle: if reduced foreign participation forces US yields higher via the term premium, it will tighten the very financial conditions that high-volatility assets like crypto depend on.

The “term premium” channel is where things get interesting

On the day the headlines broke, the US 10-year yield hovered around 4.23%. While that level isn’t inherently a crisis, the risk lies in how it could rise.

An orderly repricing is manageable, but a disorderly spike caused by a buyer strike can trigger rapid deleveraging across rates, equities, and crypto.

A 2025 economic bulletin from the Federal Reserve Bank of Kansas City offers a sobering assessment of this scenario. It estimates that a one-standard-deviation liquidation among foreign investors could spike Treasury yields by 25 to 100 basis points.

Crucially, it notes that yields can rise even without dramatic selling, as simply a reduced appetite for new issuance is enough to pressure rates higher.

Moreover, a more extreme tail-risk benchmark comes from a 2022 NBER working paper on stress episodes. The study estimates that an “identified” $100 billion sale by foreign officials could shock the 10-year yield by more than 100 basis points on impact before fading.

This isn’t a baseline forecast, but it serves as a reminder that during liquidity shocks, positioning dominates fundamentals.

Why Bitcoin cares: real yields and financial conditions

Bitcoin has traded like a macro duration asset for much of the post-2020 cycle.

In that regime, higher yields and tighter liquidity often translate into weaker bids for speculative assets, even when the catalyst begins in rates rather than crypto.

So, the real-yield component is vital here. With the US 10-year inflation-adjusted (TIPS) yield at roughly 1.89% on Feb. 5, the opportunity cost of holding non-yielding assets is rising.

However, the trap for bears is that broader financial conditions are not yet screaming “crisis.” The Chicago Fed’s National Financial Conditions Index sat at -0.56 for the week ending Jan. 30, indicating conditions remain looser than average.

This nuance is dangerous: markets can tighten meaningfully from easy levels without tipping into systemic stress.

Unfortunately for crypto bulls, that intermediate tightening is often enough to knock Bitcoin lower without 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 moves, only to rebound above $70,000 as markets stabilized.

By Feb. 9, Bitcoin is bouncing again, proving it remains a high-beta gauge of global liquidity sentiment.

Four scenarios for traders watching the China–yields–BTC feedback loop

To understand what comes next, traders are not just looking at whether China sells, but also how the market absorbs those sales. The impact on Bitcoin depends entirely on the speed of the move and the resulting stress on dollar liquidity.

Here are the four key ways this dynamic is likely to play out in the months ahead.

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

In this case, banks slow their incremental buying, and China’s headline holdings drift lower, mostly through maturities and reallocation rather than urgent selling.

As a result, US yields grind higher by 10 to 30 basis points over time, largely through term premium and the market’s need to absorb supply.

Here, Bitcoin faces a mild headwind, but the dominant drivers remain US macro data and shifting expectations for the Federal Reserve.

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

If the market interprets China’s guidance as a secular shift in foreign appetite, yields could reprice into the Kansas City Fed’s 25–100 basis point range.

A move like that, especially if real yields lead, would likely tighten financial conditions enough to compress risk exposure and push crypto lower through higher funding costs, reduced liquidity, and risk-parity-style deleveraging.

• “Disorderly liquidity shock” (tail risk):

A fast, politicized, or crowded exit, even if not led by China, can create outsized price effects.

The stress-episode framework linking a $100 billion foreign-official sale to a more than 100-basis-point move on impact is the kind of reference traders cite when considering nonlinear outcomes.

In this scenario, Bitcoin could drop sharply first on forced selling, then rebound if policymakers deploy liquidity tools.

• “The stablecoin twist” (underappreciated):

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

DeFiLlama estimates the stablecoin market cap at around $307 billion, with Tether reporting $141 billion in exposure to US Treasuries and related debt, roughly one-fifth of China’s position.

In fact, the firm recently revealed that it was one of the top 10 buyer of US Treasuries in the past year.

If stablecoin supply remains resilient, crypto capital could essentially subsidize its own existence by supporting bill demand, though Bitcoin could still suffer if broader conditions tighten.

The policy backstop factor: when higher yields become BTC-positive again

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

If a yield spike becomes disorderly enough to threaten the Treasury market itself, the US has tools ready. An IMF working paper on Treasury buybacks argues that such operations can effectively restore order in stressed segments.

This is the reflexivity crypto traders rely on: in a severe bond-market event, a short-term Bitcoin crash is often the precursor to a liquidity-driven rebound once the backstops arrive.

For now, China’s $682.6 billion headline number is less a “sell signal” and more a barometer of fragility.

It reminds us that Treasury demand is becoming price-sensitive at the margin, and Bitcoin remains the cleanest real-time gauge of whether the market sees higher yields as a simple repricing, or the start of a tighter, more dangerous regime