Bitcoin Confronts Significant Liquidity Challenge as China Puts $298 Billion in US Treasuries on the Market

China’s gradual withdrawal from US government debt is shifting from a subtle trend to a clear risk-management indicator, prompting Bitcoin traders to monitor the market for subsequent developments.

The immediate catalyst for this heightened concern arose on February 9 when Bloomberg disclosed that Chinese regulators were advising commercial banks to limit their exposure to US treasuries, citing risks associated with concentration and volatility.

This directive draws attention to the substantial amount of US bonds owned by Chinese institutions. Data from the State Administration of Foreign Exchange indicates that Chinese banks held approximately $298 billion in dollar-denominated bonds as of September.

However, a significant uncertainty and the source of market unease is the exact portion of that total that is specifically allocated to Treasuries as opposed to other dollar-denominated debt.

Additionally, this regulatory pressure on commercial banks is not occurring in isolation. It adds to a year-long strategic withdrawal from US treasuries, already apparent in Beijing’s official records.

The US Treasury’s “Major Foreign Holders” data reveals that mainland China’s official Treasury holdings decreased to $682.6 billion in November 2025, marking the lowest level in the last decade.

US Treasuries Held by China (Source: Trading Economy)

This trend has intensified over the past five years, as China has actively diminished its reliance on the US financial market.

Overall, the combined situation is stark: demand from the East is waning across both commercial and state channels.

For Bitcoin, the concern is not that China will singularly “disrupt” the Treasury market. The US market is simply too expansive for that; with $28.86 trillion in marketable debt, China’s $682.6 billion constitutes merely 2.4% of the total.

Nevertheless, the real risk is more nuanced: if diminished foreign participation drives US yields higher through the term premium, it will tighten the financial conditions that high-volatility assets like crypto rely on.

The “term premium” channel is where things get interesting

On the day the news broke, the US 10-year yield was around 4.23%. While this level is not inherently alarming, the risk lies in the potential for it to increase.

An orderly adjustment is manageable, but a chaotic surge triggered by a buyer strike can lead to rapid deleveraging across rates, equities, and crypto.

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

Importantly, it notes that yields can rise even without significant selling, as a mere reduction in appetite for new issuance can exert upward pressure on rates.

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

This is not a baseline forecast, but it serves as a reminder that during liquidity shocks, positioning often overshadows fundamentals.

Why Bitcoin cares: real yields and financial conditions

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

In this context, rising yields and tighter liquidity frequently result in weaker demand for speculative assets, even when the initial trigger originates from rates rather than crypto.

Thus, the real-yield aspect is crucial here. With the US 10-year inflation-adjusted (TIPS) yield at approximately 1.89% on February 5, the opportunity cost of holding non-yielding assets is increasing.

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

This nuance is precarious: markets can tighten significantly from easy levels without entering systemic stress.

Unfortunately for crypto bulls, that intermediate tightening is often sufficient to push Bitcoin lower without prompting a Fed intervention.

Notably, Bitcoin’s recent price movements confirm this sensitivity. Last week, the leading digital asset briefly dipped below $60,000 amid widespread risk-off sentiment, only to recover above $70,000 as markets stabilized.

As of February 9, Bitcoin is rising again, demonstrating that it remains a high-beta indicator of global liquidity sentiment.

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

To anticipate what follows, traders are not solely focused on whether China will sell, but also on how the market will absorb those sales. The effect on Bitcoin entirely hinges on the pace of the move and the resulting strain on dollar liquidity.

Here are the four primary ways this dynamic is likely to unfold in the coming months.

• “Contained de-risking” (base case):

In this scenario, banks reduce their incremental buying, and China’s headline holdings gradually decline, primarily through maturities and reallocation rather than urgent selling.

Consequently, US yields increase by 10 to 30 basis points over time, mainly through term premium and the market’s need to absorb supply.

In this case, Bitcoin faces a slight headwind, but the primary influences remain US macro data and evolving expectations for the Federal Reserve.

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

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

A shift of this nature, particularly if real yields lead, would likely tighten financial conditions sufficiently to compress risk exposure and drive crypto lower through increased funding costs, diminished liquidity, and risk-parity-style deleveraging.

• “Disorderly liquidity shock” (tail risk):

A rapid, politicized, or crowded exit, even if not initiated by China, can create significant price effects.

The stress-episode framework linking a $100 billion foreign-official sale to a more than 100-basis-point move upon impact is the type of reference traders consider when evaluating nonlinear outcomes.

In this scenario, Bitcoin could initially decline sharply due to forced selling, then recover if policymakers implement liquidity measures.

• “The stablecoin twist” (underappreciated):

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

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 disclosed that it was among the top 10 buyers of US Treasuries in the past year.

Tether US Treasury Purchases (Source: Tether)

If stablecoin supply remains robust, crypto capital could effectively subsidize its own existence by bolstering bill demand, although Bitcoin could still experience declines if broader conditions tighten.

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

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

If a yield spike becomes chaotic enough to jeopardize the Treasury market itself, the US has measures in place. An IMF working paper on Treasury buybacks suggests that such actions can effectively restore order in stressed segments.

This is the reflexivity that crypto traders depend on: during a severe bond-market event, a short-term Bitcoin decline is often a precursor to a liquidity-driven recovery once the backstops are activated.

For the time being, China’s $682.6 billion headline figure is less a “sell signal” and more an indicator of fragility.

It serves as a reminder that Treasury demand is becoming price-sensitive at the margin, and Bitcoin continues to be the clearest real-time measure of whether the market perceives higher yields as a mere repricing or the onset of a tighter, more perilous regime.

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