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

China's gradual reduction of its US Treasury holdings, recently amplified by regulatory guidance urging commercial banks to limit concentration risk in US debt, poses a subtle threat to Bitcoin. While China's $682.6 billion in official holdings is too small to break the deep US Treasury market alone, reduced foreign participation could force US yields higher via the term premium. This tightening of financial conditions increases the opportunity cost of holding non-yielding assets like Bitcoin, as reflected by rising real yields. Analysts suggest that a disorderly spike in yields, even from reduced appetite for new issuance, could trigger rapid deleveraging across risk assets. Traders are watching four scenarios, ranging from 'contained de-risking' to a 'disorderly liquidity shock.' Paradoxically, stablecoins, which hold significant US debt, might partially subsidize bill demand. Ultimately, Bitcoin's fate hinges on whether yield increases remain orderly or trigger a severe bond market stress event that prompts a policy backstop, which historically has preceded a liquidity-driven rebound for crypto.

(Source：CryptoSlate)