By Yang Tianzi
Global financial markets are recently engulfed in panic, as two seemingly unrelated markets simultaneously sent alarming signals. In the cryptocurrency sector, “digital gold” Bitcoin fell below the key $70,000 level, hitting a 15-month low, with market sentiment indicators signaling extreme fear in the crypto space. At the same time, the Financial Stability Board (FSB) issued a stern warning that hedge funds’ leveraged positions in global government bond markets have reached a record $2.7 trillion. Any market stress could trigger a chain reaction of sell-offs, sharply increasing global borrowing costs and potentially sparking a new financial crisis.
These two events did not happen by chance at the same time; they reflect a shared fragility in the global financial system: excessive leverage, high interconnectivity, and extreme reliance on liquidity. When market confidence cracks, risks quickly transmit across sectors, creating cross-asset chain reactions.
Bitcoin faces technical collapse as institutional funds exit
Bitcoin’s sharp drop on Feb. 5 was particularly notable. Its price briefly fell to $69,821, breaking the psychologically important $70,000 level and marking the lowest point since early November 2024. Compared with the all-time high in October last year, Bitcoin has retraced over 44 percent, officially entering a deep correction zone.
Andrew Tu of Efficient Frontier noted that following last week’s crash, crypto market sentiment has reached extreme fear. He warned, “If Bitcoin fails to hold above $72,000, it could easily fall to $68,000 or even revisit 2024 lows.” CoinShares’ Head of Research James Butterfill shared similar views, emphasizing that $70,000 is a “key psychological barrier,” and losing it could push prices to the $60,000–$65,000 range.
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The drivers of this Bitcoin decline have fundamentally shifted. Early crashes were mostly due to internal crypto leverage liquidations, but recent selling stems from broader cross-asset risk-off behavior. According to Coinglass, about $722 million in long crypto positions were liquidated in the past 24 hours, showing that highly leveraged investors suffered significant losses during the price plunge.
Worryingly, the sell-off has spread to traditional financial markets. On Feb. 4, the Nasdaq 100 Index dropped nearly 2 percent, followed by declines in Asian and European markets, showing global risk assets facing synchronized downward pressure. In such an environment, Bitcoin cannot remain isolated.
A key change comes from institutional behavior reversal. Blockchain analytics firm CryptoQuant reported that institutional demand for Bitcoin has “substantially reversed.” Data show that U.S. Bitcoin ETFs were net buyers of about 46,000 BTC last year, but this year have turned into net sellers, becoming a major source of selling pressure.
This “buy-to-sell” shift is evident not only in fund flows but also in technical indicators. CryptoQuant reports that Bitcoin has fallen below its 365-day moving average for the first time since March 2022. Historically, after breaking the annual moving average in 2022, Bitcoin fell 23 percent over 83 days; the current decline is approaching or even surpassing that correction magnitude.
Bond markets pose systemic risk
While the crypto market experiences extreme volatility, the core of traditional finance—the global bond market—is also brewing deeper systemic risks. FSB warnings reveal a startling reality: hedge funds have heavily leveraged global government bonds, with positions reaching a record $2.7 trillion.
These funds primarily use “basis trades” to profit, exploiting small price differences between bond spot and futures markets. To amplify these slim profits, they leverage the low-risk nature of government bonds as collateral, borrowing enormous sums in the repo market. Currently, hedge funds’ cash borrowing in repos has reached $3 trillion, accounting for 25 percent of total assets.
The FSB specifically warned that if markets come under stress, the repo market could quickly experience supply-demand imbalances. When volatility rises sharply, cash borrowers may urgently need liquidity to meet margin calls, while cash lenders may be unable or unwilling to provide funds during stress periods.
This liquidity crunch would force asset managers relying on repos to finance sovereign bond positions to quickly liquidate assets, causing government bond prices to collapse. Since government bonds are typically benchmarked, their collapse would push up global borrowing costs and impact the entire financial system.
Warning signs from the UK bond market
Andrew Bailey, Governor of the Bank of England and FSB leader, has repeatedly warned that hedge funds’ growing role in the UK bond market could threaten financial stability. Bank of England data show that by the end of November last year, hedge funds had borrowed £100 billion to purchase UK government bonds—a tenfold increase from a year earlier—illustrating the seriousness of the problem.
The FSB emphasized that the interconnections between banks, hedge funds, and other financial institutions can amplify shocks. This interconnectivity is a hallmark of modern finance and a primary source of systemic risk.
Interconnected risks across markets
The Bitcoin crash and leveraged bond market risks are not isolated events but form a complex network of interrelated risks. Although these markets differ in nature, both face the same core issues: excessive leverage, high interconnectivity, and extreme sensitivity to liquidity.
Currently, market conditions are dangerous: correlations between asset classes are increasing. Many institutional investors operate across multiple markets, so losses in one market may force them to sell in others to meet margin calls. This cross-market contagion could rapidly spread risks, turning a single-market problem into a systemic crisis.
In crypto, leverage is mainly via margin trading, perpetual contracts, and lending platforms; in bonds, leverage comes through repo financing and derivatives. Different tools, similar mechanics: profits are magnified in favorable conditions, and losses are amplified in adverse ones.
Outlook
Global financial markets may face an extended period of adjustment. Whether Bitcoin can hold the $70,000 level will be a key indicator for short-term crypto trends, while resolving bond market leverage issues is critical for long-term financial stability.
Current turbulence may not be temporary but part of a structural market adjustment. After years of low interest rates and quantitative easing, global markets are adapting to a new policy environment. This adjustment may involve significant volatility and uncertainty but could lay the foundation for long-term healthy development.
Investors in both cryptocurrency and traditional markets need to prepare for the possibility of larger fluctuations.
