What Widening U.S. Credit Spreads Mean for Bitcoin: Risk or Opportunity?

1-15) The marginal buyer of Bitcoin may increasingly be U.S. investors concerned about a sharply weakening dollar as global capital continues to exit U.S. financial markets. This dynamic is the flip side of running (and attempting to reverse) a persistent trade deficit—its consequences now becoming evident not just in the declining value of the dollar and rising bond yields but also through stress in the credit markets and continued pressure on U.S. equities.

Both, U.S. dollar and U.S. bonds selling off (higher yields)

2-15) As we highlighted in yesterday’s report, it remains premature to adopt a bullish stance. With capital flowing out of the U.S., the euro appears to be emerging as a relatively safer haven in the current environment. The 90-day tariff truce was a clear attempt to stabilize spiking U.S. Treasury yields—but with yields now threatening to retest their recent highs, the move seems to have backfired, highlighting the market’s skepticism and the limits of such short-term interventions.

3-15) As measured by the ICE BofA BBB US Corporate Index Option-Adjusted Spread, credit spreads continue to widen, indicating that recessionary concerns may be seeping deeper into the economy. Historically, this has posed a headwind for Bitcoin. Short-term risks remain elevated, while the longer-term implications can be bullish—especially as Bitcoin has tended to benefit from the monetary easing that typically follows Fed rate cuts. But expecting a bullish impulse is too early.

Bitcoin (LHS) tends to sell off when Credit Spreads starts to widen YoY (RHS)

4-15) If we look at the last two instances when the year-over-year change in credit spreads began to widen, as it is now, Bitcoin tended to struggle both in terms of time (with recoveries taking 4–6 months) and price (with further downside before a bottom was reached). This pattern suggests that while a longer-term opportunity may emerge, Bitcoin could still face pressure in the near term.

5-15) Similarly, while we anticipate the Chinese yuan (CNY) gradually weakening by approximately 3–5% in the coming weeks—targeting a USDCNY range of 7.5 to 7.7—it's important to note that currency devaluations have historically been bearish for markets in the short term before turning bullish later on.

6-15) However, today’s environment is markedly different from 2015, when China last undertook a significant devaluation. Back then, Bitcoin was one of the few accessible crypto assets, making it a primary vehicle for capital outflows. Now, stablecoins like USDT (Tether) offer a more convenient and less volatile on-ramp, reducing the need for Chinese investors to turn to Bitcoin directly.

7-15) Additionally, there appears to be less disposable capital in the Chinese economy today compared to 2015. As a result, even if the yuan weakens, we do not expect Chinese investors to be the marginal buyers of Bitcoin, as they were during previous cycles dating back to 2013.

8-15) U.S.-based investors may need to step in as the marginal buyers of domestic assets, as the latest confidence crisis appears to be driven by foreign investors losing faith in the U.S. economy/financial markets. Notably, the recent stock market decline has been accompanied by a weakening U.S. dollar and a sell-off in the U.S. bond market—an unusual and concerning combination.

9-15) As we highlighted yesterday, there’s a growing shift toward home bias among international investors, with the euro emerging as a key beneficiary. In fact, with a +3.1% gain over the past 24 hours, the euro experienced one of its strongest single-day moves in recent history.

10-15) It's important to understand that the U.S. not only runs a trade deficit in goods with the rest of the world but also maintains a capital account surplus. Foreign capital flows into the U.S. to finance this imbalance. These inflows come from foreign purchases of U.S. Treasury bonds, equities, real estate, and direct investments.

11-15) The trade and capital accounts are inherently interconnected: if the U.S. imports fewer goods, it naturally receives less foreign capital. We are witnessing the unwinding of years of global overexposure to U.S. assets—a shift that puts pressure on stocks and bonds. As foreign investors repatriate capital, the U.S. dollar weakens, amplifying the impact across financial markets.

12-15) While much of the recent attention has been on the unwinding of the Treasury basis trade, a deeper concern is emerging: that rising inflation driven by tariffs could prompt the Fed to scale back the four rate cuts currently priced in for this year. At the same time, foreign investors—particularly the Japanese—appear to be reducing their exposure to U.S. Treasuries. This concern came to a head earlier this week when 10-year yields briefly spiked to 4.5%, prompting Treasury Secretary Bessent to urge President Trump to shift the narrative around the tariff endgame.

13-15) Although Bessent has downplayed the sell-off as an “orderly” adjustment driven by hedge fund unwinding, broader signals suggest fiscal risks are growing. Elon Musk’s likely exit from DOGE hints that any fiscal savings may have already peaked. Meanwhile, the House of Representatives has passed a budget proposal that paves the way to extend the 2017 Trump tax cuts, which are set to expire at the end of this year. The extension could add an estimated $5.5 trillion to the federal debt over the next decade if enacted.

14-15) If the economy slips into recession, the fiscal burden could increase significantly, creating major headwinds for traditional financial markets and Bitcoin. This underscores the importance of closely monitoring credit markets, not just for equity investors but also for crypto traders.

15-15) In the near term, Bitcoin will likely stay under pressure as global trade flows shift and capital reallocates. A weakening U.S. dollar could prompt more American investors to turn to Bitcoin as an alternative store of value. However, downside risks for Bitcoin persist until our minting indicator shows a meaningful pickup in fiat inflows into the crypto space. This is not yet the case.

Bitcoin (LHS) vs. Stablecoin inflows relative to crypto market cap (RHS)