Federal Reserve Flags Elevated Risk as Bitcoin Rallies

The Federal Reserve's new financial-risk gauge, known as the Financial Vulnerability Index (FVI), has detected elevated risk in the financial system. The FVI measures structural weaknesses that can amplify shocks, rather than current market stress.

According to the Fed's data, large hedge funds held $4 trillion in gross Treasury exposure and $3 trillion in repo borrowing as of September 2025. This suggests that the financial system is carrying significant leverage.

The FVI has also shown that Bitcoin's rally is not driven by the same factors as the broader market. Spot buying and short liquidations supported Bitcoin's price increase, while derivatives leverage remained elevated.

While Bitcoin's immediate path remains tied to flows, liquidity, and positioning, the FVI suggests that the financial system is vulnerable to shocks. The index shows that high-FVI periods are associated with deeper declines in consumption and long-term investment.