How the Tariff Shock Is Reshaping Markets
To say that the weeks following the Trump administration’s announcement of massive tariffs have been eventful does not really do it justice. With a brutally crashing and sometimes rebounding market, collapsing trade with China, total confusion over future tariffs, and supply chain disruptions, the financial markets and the economy as a whole are still scrambling to figure out how it will play out.
“The CEOs of Walmart, Target, and Home Depot, all of whom delivered a blunt message about interruptions in the supply chain and its effects on consumers.
Trump’s tariffs have placed significant pressure on the retail sector. The business leaders warned that store shelves across America could soon be empty.”
Source: CNN
In such periods, it is usually “safe assets” that benefit the most, as capital flees to safety until the storm clears. However, what constitutes a safe asset in the modern era has been an open question in recent years.
Historically, and to this day, this would have meant gold, as the only currency independent of any government. More recently, US government bonds have been considered by economists as the “risk-free” benchmark on which the entire global economic system is anchored.
Another strong contender today is Bitcoin(BTC +1.38%). This is because Bitcoin replicates many of the features that historically made gold a safe haven in a digital form.
In this recent turmoil, it seems that Bitcoin performed this role well. But does that mean that investors should expect, from now on, for Bitcoin to be de-correlated from broader markets?
Post-Tariff Fallout: What Happened and What’s Next
On April 2nd, dubbed “Liberation Day” by President Trump, a massive wave of tariffs was announced and followed by more tariffs in the following days.
Overall, the tariffs were:
- Base tariff of a minimum of 10% on the whole world.
- 25% on all imports from Canada & Mexico, as well as steel, aluminum, and automotive imports.
- Tariffs ranging from 11-50% in many countries and economic blocs (like the EU) were mostly decided according to the trade deficit numbers, rather than reciprocal tariffs.
- Triple-digit tariffs on China, with fluctuations in the actual rate virtually every week as China retaliated with its own tariffs.
- Quadruple-digit tariffs on solar panels from SE-Asia, notably 3,521% duties for Cambodian panels.
Source: USA Today
While likely far from over due to the broader and intensifying competition between the US and China, it seems the first round of tariff shock has now somewhat passed.
Investor Panic and Market Repricing Explained
The intensity and rapid escalation in tariffs shocked market participants and triggered an immediate sell-off. It was followed by intense days as the main indexes sawsawed up and down, depending on whether it looked like a tariff deal with some of the US’s main trade partners was likely or not.
Many large investors also considered derisking and reducing exposure during the turmoil.
“What you’re looking at, broadly speaking, is a market that is frustrated, uncertain and confused about where we’re going to be one day to the next. In that environment you have a tendency to see some investors choosing the safety of cash.”
John Canavan – Lead analyst at Oxford Economics
Bitcoin’s Decoupling: Signal or Blip?
Initially, it appeared that Bitcoin would crash alongside other financial assets. But this trend did not last, and even quickly reverted. While Bitcoin is still not yet back to its all-time highs well above the symbolic $100,000 mark, it stands at $95,500 at the time of writing this article.
However, thanks to the broader market decline of the last weeks, Bitcoin is soon breaking through its highest point ever when compared to the S&P500, which is likely a more relevant comparison point for most investors.
Source: Daily HODL
How Gold, USD, and Bonds Responded
Another major, and surprising, winner of the tariffs has been gold. Gold had previously been only slowly rising in price since its low point in 2016, with years-long periods of no growth. However, it is up 25% year-to-date, with unprecedented moves of more than $100/ounce in one day at times.
Source: Trading Economics
Meanwhile, the US dollar itself has been declining in value quickly against major currencies like the Euro.
Source: Google Finance
But maybe the most surprising result, one that was likely unexpected even at the White House, was a pronounced weakness in US bonds. For example, the 10-year US bonds saw their yields increase, in total contradiction to expectations, as declining stock prices are usually correlated to rising bond value (and declining bond yields).
Source: CNBC
Altogether, the market’s and other assets’ reactions show a pretty grim picture. The tariffs are perceived as very disruptive, but more importantly, the USA itself is not seen as a safe place to park money during a market crash or a potential recession.
Instead, a flight to safety is occurring, with traditional gold and digital gold (Bitcoin) gaining value, while the US dollar’s value declines. If these moves in the bond market persist, this could increase the cost of the US debt, putting a strain on the country’s finances.
Is Bitcoin Now a Risk Asset or Safe Haven?
For a long time, a raging debate has been ongoing for more than a decade about whether Bitcoin should be considered a speculative asset, more akin to a tech stock, or a safer, storage of value type of asset.
During the pandemic, the tight correlation of Bitcoin to biotech and tech stocks, first rising rapidly, then crashing back down, gave some arguments to Bitcoin critics that it was, first and foremost, a tool for speculation.
In that view, only gold is the ultimate safe asset. It could, however, be called somewhat dishonest, as gold first rose and then crashed with the market leading to 2009, illustrating that even safe assets can be victims of global liquidity events.
Source: The Global Economy
However, it seems that the current crisis is shaping up to be more of a monetary nature. The problem is not a freezing of the credit cycle or a banking crisis. Instead, it is the position of the USA as the global hegemon, the status of the USD as a reserve currency, and the structure of the globalized economy that is in question.
“Growing U.S. dollar debasement concerns are driving the shift, including those that stem from unsustainable debt dynamics and Trump’s willingness to target Powell”
David Duong – Head of Research at Coinbase Institutional
Bitcoin Design & Role Vindicated
These are exactly the kind of conditions for which Bitcoin was created. Like gold, it displays all the characteristics of a reserve asset, protected from the vagaries of national or international monetary crises:
- Fix supply that only grows very slowly over time, with a total supply that is limited and can ultimately be mined.
- Supply is also relatively limited, with most of the ultimately available Bitcoins already mined.
- Infinitely fungible: it can always be divided into smaller portions if needed.
- Interchangeable: every Bitcoin is identical to another one.
- Not tied to any particular currency, nation, government, ideology, or economic system.
- Easy to transfer, store, transport safely, discreetly, and anonymously.
Some will even argue that Bitcoin is superior to gold thanks to a few additional features.
Notably, it is easy to pay for things with it, both online and offline, something that is hardly possible to do today with gold or silver coins.
It is also a digital-native reserve asset, naturally working better than precious metals in a highly computerized economy. And it is easier to move around and hide, making it potentially safer against robbery or state seizure.
As Bitcoin is also virtually impossible to falsify, thanks to the robustness of blockchain technology, it might even be safer than gold, which occasionally might have to contend with fake gold bars and fraud.
What Does It Mean For Bitcoin’s Future
Bitcoin Vs Gold
In retrospect, the debate between Bitcoin and gold proponents may seem somewhat irrelevant. If a full-blown currency crisis were to unfold, money would flood into every available reserve asset, as well as tangible assets like land and real estate, as investors try to avoid the quickly devaluing paper currency.
So both gold and Bitcoin owners would greatly benefit, with only the Bitcoin-to-gold ratio in question, depending on which is used as a foundation for a new monetary system. It might, however, be a little soon to be certain that Bitcoin is decoupling from financial markets, as a mere few weeks is definitely too little data to draw any conclusions.
“Bitcoin’s resilience in the last week while stocks maintained their downward trajectory seems to hint at shifting capital market assumptions.
However, I hesitate to say that Bitcoin has conclusively decoupled from traditional assets, as we would need to see this shift persist through varying market conditions before pegging it as a secular rather than cyclical trend.”
David Duong – Head of Research at Coinbase Institutional
Too Soon to Celebrate? A Cautionary View
Both gold and Bitcoin enthusiasts, as well as macroeconomic analysts, should, however, be wary of moving too far ahead. While concerning, the reaction to tariffs is yet to unfold a serious debt or monetary crisis for the US or any other nation.
Doomsayers should always be considered with a healthy dose of skepticism, as they often make their living from consistently predicting catastrophe, more than from accurate predictions.
There are also signs that Trump might be backing down somewhat from his initial stand on tariff policy, even if it might prove politically costly. He is also walking off a comment about firing the head of the Federal Reserve, which could have increased the perception of a debt/monetary crisis unfolding in the USA.
The warnings — and the markets’ own volatility this week — seemed to have broken through. Trump backed down Tuesday from his threats to try to remove Powell from the job, telling reporters in the Oval Office: “I have no intention of firing him.”
That prompted sighs of relief on Wall Street. A day after markets boomed on comments from Treasury Secretary Scott Bessent that Trump would seek to de-escalate the trade war with China, US markets gained again on Wednesday.
Source: CNN
The goal now seems to be a “2 to 3-year timeline for the full rebalancing”, very different from the immediate deal-making previously pursued. This would likely also give industries and retail chains time to find new suppliers outside of China, relocate production, and so on.
Bitcoin’s Role in a New Financial Paradigm
Bitcoin has been displaying a fascinating pattern of decoupling from global markets in the midst of tariff-induced financial turmoil. This made it tightly correlated to gold but opposite to the reaction of bonds.
This is likely indicating that investors were first and foremost looking for safety from what was perceived as erratic policies on international trade, and dangers stemming from the rising debt levels of the US.
In the short term, more composed declarations about tariffs and renegotiations of trade deals could appease the markets and reduce the risk premium given to Bitcoin and gold.
However, it appears that the USA is entering into a prolonged conflict over tariffs, trade deficits, and overall geopolitical influence with China. So it is very likely that the second Trump presidency will be tumultuous.
If that is so, Bitcoin will likely be one of the prime beneficiaries in the long term, especially now that there is a blueprint (and expectations) for it to decouple from stock markets during market declines driven by international tensions, and a decorrelation from tech stocks in these circumstances.
To learn more about Bitcoin, make sure to visit our BTC Investing Guide HERE.