The bond market is screaming: the real source of the simultaneous decline of cryptocurrency and U.S. stocks

Author: Little Cake
BTC fell below $82,000, and altcoins are in a sea of red. At the same time, the Nasdaq continued to decline, with the tech sector leading the drop. This is not just a problem within the crypto market; it is money withdrawing from all risk assets.

To understand this round of correction, one must first see a line clearly: the yield on the 30-year U.S. Treasury bond, 5.70%, the highest since 2002.

What story is the bond market telling?

The anchor for all asset prices is the risk-free rate of return. When U.S. Treasuries offer you an annualized return of 5.3% to 5.7%, guaranteed by government credit, you need a very strong reason to put your money into BTC or Nvidia.

In the first week of October, the yield on the 10-year U.S. Treasury bond reached 5.35%, a 24-year high. The 30-year yield is even more exaggerated at 5.70%, a number not seen since the burst of the internet bubble in 2002.

Why are yields rising? Two things are overlapping.

Oil prices are the trigger. Brent crude oil surpassed $110 in October, the Houthis attacked Riyadh Airport, tankers near Yemen were attacked, and Iran's stance on the Strait of Hormuz remains ambiguous. Rising energy prices directly push up inflation expectations, and the bond market begins to price in that "the Federal Reserve will not only not cut rates but may also raise them."

Fiscal pressure is the backdrop. The U.S. government's debt continues to expand, and there are no signs of relief in bond supply pressure; demand for several Treasury auctions has not been strong. When supply exceeds demand, prices fall, and yields rise.

Then the Federal Reserve raised rates by 25 basis points to 3.75%-4.00% in September, and in the minutes from the October 7 meeting, 9 out of 18 committee members believed there would be another hike this year. The market currently assigns a probability of about 20% for a rate hike on October 28, but the probability for a December hike has already exceeded 80%.

For risk assets, the implication of this combination is simple: the cost of capital is becoming more expensive, and there is no turning point in sight in the short term. Money will not stay in high-volatility assets for no reason unless expected returns can cover this cost.

BTC: From 83,000 to 81,000, leverage dies first

BTC was stuck in the range of $83,000 to $87,000 in early October, repeatedly testing the upper limit without success. On October 8, it finally chose a direction and broke downwards.

After falling below the support level of $81,500, leveraged positions began to liquidate in a chain reaction. According to CoinGlass data, $1.16 billion was liquidated across the network within 24 hours, of which 90% were long positions. About 190,000 accounts were affected. The largest single liquidation was a position on Hyperliquid for ETH, close to $20 million. Open interest in futures contracts shrank by 5.9% within 24 hours, dropping to $143.2 billion.

On the same day, the U.S. spot BTC ETF saw a net outflow of $484.9 million, the largest single-day outflow since June 25. BlackRock's IBIT saw an outflow of about 2,430 BTC, Fidelity about 1,230 BTC, and ARK 21Shares about 1,190 BTC. The ETH ETF fared worse, experiencing net outflows every trading day since September 29.

The 20-day moving average for BTC has been breached. Technically, the next strong support is at $75,000; if this level cannot hold, $70,000 is the next line of defense.

Altcoins: Higher leverage, thinner liquidity, worse falls

BTC fell 3%, while altcoins dropped 10% to 30%, which has become the norm, but it is still shocking to see the specific numbers.

The 24-hour drop on October 13: BOME fell 30%, BLUR fell 29%, STRK fell 28%, CKB fell 22%, ENA fell 15%, NEAR fell 13%. ETH fell 5.3% on October 8 and dropped 9.3% over the week. SOL fell to $108, DOGE to $0.083, both down about 7%.

Why do altcoins always fall harder?

The reason is simple: thin order books. A sell order of $1 million might only move BTC by 0.1%, but on an altcoin with a daily trading volume of a few million dollars, it could directly create a 5% gap. Small traders in the perpetual contract market use high leverage, and when prices move, it triggers liquidations, which further accelerates price declines, creating a spiral.

Funds are doing something very clear: withdrawing from small coins and flowing back into BTC and stablecoins. The market cap share of BTC is rising. The winners of this round of correction are only USDT and USDC.

A few exceptions: Monero only fell 2.2% this week, and TRON's drop was less than 1% on the same day. The common feature of these two projects is that they have real use cases and ongoing on-chain activity, making them a safe haven amid panic.

U.S. Stocks: It's not just a crypto issue

If the crypto market were falling in a vacuum, it could be attributed to issues within the industry itself. But when the Nasdaq and BTC both weaken, the problem lies upstream.

On October 12, U.S. stocks closed: the Nasdaq fell 0.44%, the S&P 500 dipped 0.06%, and only the Dow Jones managed to close slightly up, thanks to the energy and consumer staples sectors. The tech sector was the weakest on that day, falling 1.25%. The Russell 2000 fell 0.45%, with small-cap stocks under more pressure.

The worst hit was the South Korean stock market. On the morning of October 13, affected by the escalating situation in the Middle East and a sharp decline in the semiconductor sector, the Korean stock market continued to fall, with the KOSPI index opening down 3.1% at 6,186.08 points, and the decline quickly expanded to over 4%.

The logic is the same as in the crypto market: Treasury yields are at historical highs, rate hike expectations have not faded, and oil prices remain high. Tech stocks and crypto assets are the longest-duration risk assets, most sensitive to interest rates. When the risk-free rate rises from 3% to over 5%, all assets that rely on "future growth" narratives need to be repriced.

The Nasdaq reached an all-time high in early October but could not hold it. The retreat after hitting a new high indicates that bulls lacked follow-through at elevated levels, and profit-taking occurred.

What to watch next

This week is data-heavy.

On October 14, the September CPI data will be released. This is the most important data point before the October 28 FOMC meeting. If inflation exceeds expectations, the market will immediately raise the probability of a rate hike in October from 20%, and risk assets may have another wave of downward space. If inflation is below expectations, the market will breathe a sigh of relief, and both BTC and the Nasdaq may see a short-term rebound.

On October 15, there will also be PPI and retail sales data, and on October 16, Federal Reserve Chairman Warsh will speak at the IMF annual meeting. Warsh mentioned in the September meeting that "inflation is too high and has been for too long," and the market wants to hear whether his stance has softened.

Bank earnings reports will also be densely released this week. JPMorgan, Goldman Sachs, and Citigroup will all release quarterly reports on Tuesday. Analysts expect S&P 500 constituents to see overall earnings growth of about 30% this quarter. If actual performance and guidance can support this expectation, U.S. stocks are likely to stabilize; if below expectations, combined with a high-interest-rate environment, adjustments may deepen.

In summary, the correlation between BTC and the Nasdaq has been increasing over the past two years. The pattern of moving together in both directions will not change in the short term; to see the direction of the crypto market, first look at the CPI report.