Place bacon in a large, heavy-bottomed pot and cook over medium heat until bacon is crispy and the rendered fat is foaming, about 10 minutes. Pour bacon and rendered fat into a strainer placed over a bowl to drain fat. When fat is drained and bacon is cool enough to handle, remove bacon to a cutting board and finely chop.
Return pot to medium heat; drizzle 2 teaspoons reserved bacon fat and butter in pan. Saute onions and 1 teaspoon salt until soft and translucent, 7 to 10 minutes.
Stir brown sugar, sherry vinegar, 1 teaspoon thyme leaves, black pepper, and cayenne into onion mixture; add bacon. Stir water into bacon mixture and cook until jam is a brick-brown bacon color and has a jam consistency, 10 to 15 minutes.
Remove from heat and stir balsamic vinegar, olive oil, and remaining 1/2 teaspoon thyme into jam; stir until shiny and heated through.