A Bitcoin Paradox: Good or Bad in an Economic Environment of Tariffs?

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A Bitcoin Paradox: Good or Bad in an Economic Environment of Tariffs?

Trump’s recent announcement regarding the multiple tariffs he will impose on various countries have shaken global equity markets, including that of U.S. itself.

While tariffs are seen as a form of trade protectionism to protect domestic industries, there are often unwanted spillover effects in the form of worsening international ties, potential cost-push inflation and strong retaliation from the affected countries.

Now, general economic theory would tell you how bonds and equities may perform in such a scenario. However, the case for cryptocurrency is not so straightforward. In this article, I go over a paradox with regard to ‘s performance in such an economic environment.

Why Bitcoin performance may be harmed

We now go through how an economic environment of tariffs can harm Bitcoin’s performance. But first, let’s go over how tariffs affect the economy in general.

• Cost-push inflation and how various economies are affected

As stated previously, the introduction of multiple tariffs can lead to cost-push inflation. In a case where the U.S. is unable to produce as efficiently in certain industries, firms will face significantly higher production costs — either from paying the tariff or utilising less cost-efficient local resources.

These prices eventually get passed on to the consumer if firms want to maintain their profit margins, leading to cost-push inflation — an extremely harmful type of inflation which can lead to stagflation, since price increases are not because of increased consumption and investment levels in a thriving economy, but rather because of higher production costs. The potential result is detrimental to the U.S.’s economy, as consumers have reduced purchasing power in an environment where the economic growth is stagnant.

In addition to the above, tariffs imposed (by the U.S.) on other countries can also harm their economies due to potentially lower export revenues, especially if they are unable to find other countries to supply to. This decline in export revenue can be quite significant for countries heavily depending on the U.S. for trade — like Mexico, China and Canada, which have each exported more than $400b worth of goods to the U.S.. Then, there is the matter of retaliatory tariffs (imposed back onto the U.S.) by these countries, which add another potential layer of economic uncertainty. In general, it is easy to see that an economic environment of tariffs can potentially be detrimental to many of the affected economies.

Risk assets like equities, junk bonds and cryptocurrencies (amongst others) tend to perform poorly during trying economic conditions. If the introduction of tariffs plays out poorly, consumers would shy away from assets considered to be more volatile — with equities and Bitcoin easily falling under this category.

In recent times, the short-term correlation coefficient between Bitcoin prices and the is approximately 0.88, indicating a strong positive relationship (as of late). As such, in a potential economic downturn where stocks begin selling off, holders of Bitcoin may also begin taking profit (or cutting losses), negatively impacting Bitcoin prices. This is why many analysts believe that Bitcoin prices will fall together with other risk assets due to the introduction of Trump’s tariffs. In fact, the token’s price dropped to a 3-week low after the tariffs were first announced.

Why Bitcoin performance may improve

With the previous case in mind, let’s go over why the scenario may not play out in such a straightforward manner.

• The Decoupling of Bitcoin from Stock Indices

We have seen in multiple cases of economic uncertainty (though not all) where Bitcoin’s performance can decouple from popular stock indices like the S&P 500. For example, during the 2023 Banking Crisis (where Silicon Valley Bank, amongst other banks, started collapsing), popular indices like the S&P 500 and NASDAQ 100 fell significantly due to a massive injection of fear and uncertainty in equity markets. However, Bitcoin’s performance remained strong and even rallied further as investors flocked to Bitcoin, seeing it as a safe haven alongside popular precious metals like gold. As such, the argument that Bitcoin moves in the same trend as equities cannot be generalised for all cases, especially in specific periods of economic downturn.

• Is Bitcoin considered a safe haven?

Currencies can be manipulated, shares can be issued, and other cryptocurrencies can increase their supply infinitely if they wish to — but Bitcoin’s maximum supply is fixed permanently at 21 million coins, giving the token an element of scarcity that is present in commodities like gold, silver and oil. In addition, the Bitcoin Halving, which occurs every 4 years, reduces the rates at which new coins are created and hence, lowers the available amount of new supply. Because of this, there is a case for Bitcoin being a valid hedge during times of economic uncertainty.

Where The Paradox Lies

On one hand, Bitcoin generally functions as a risk asset, together with equities and junk bonds. Yet, when specific situations of economic uncertainty present themselves, Bitcoin does not necessarily behave like a risk asset in terms of its performance — instead, it can become a ‘safe haven’ of sorts, with its price following a similar trend to commodities like gold.

On the other hand, Bitcoin’s historical volatility is infamous — trading between $15k and $100k in a span of about 4 years, and having 24-hour fluctuations of over 20% on numerous occasions. It is anything but a safe haven, which is supposed to be a store of value.

So, if it isn’t a risk asset, nor a safe haven, what is it? Or maybe it’s both — but how can Bitcoin be risky and safe at the same time? This is where the paradox lies.

The Tariff Situation

With respect to the tariff situation, it is near-impossible to determine the direction of Bitcoin’s performance — and it’s mainly because of this paradox. It seems that even investors and analysts themselves are uncertain with regard to the true function of Bitcoin during economic uncertainty. If it’s a safe haven, then maybe you should load up, but if it’s a risk asset, then maybe it’s good to take some profits.

So, which one is it? I suppose your guess is as good as mine.

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