Key Points
- Recent regulatory changes in the US have led to optimism in the crypto industry.
- However, the crypto market has shown increased vulnerability to macroeconomic factors, particularly tariffs.
The crypto industry has been buoyed by recent changes in the US regulatory environment. A surge of optimism has been fueled by a range of developments, including the President’s own memecoin, the SEC’s commitment to reducing crypto enforcements, and the White House’s executive order to establish regulatory clarity for cryptocurrencies.
Regulatory Changes and Crypto Adoption
During Trump’s term, the Securities Exchange Commission implemented SAB 122, which is believed to facilitate crypto adoption. There has also been a strong global push towards a Bitcoin reserve.
Despite this optimism, the crypto market has shown increased vulnerability to macroeconomic factors. This was evident when the crypto market lost $2 billion following President Trump’s announcement of tariffs on China, Canada, and Mexico.
The Impact of Tariffs on the Crypto Market
Some experts suggest that the original liquidations exceeded $10 billion, which is significantly worse than the liquidations during the FTX fallout. Factors such as “buy the rumor, sell the news” might have influenced the crypto market.
There is currently a pause on the tariff implementation, as Trump has agreed to postpone Canada and Mexico tariffs by a month. If implemented, these tariffs could increase the risk of a recession by restricting consumer spending and increasing economic uncertainty.
Tariffs function as a tax on imported goods, designed to protect domestic industries by making foreign products relatively more expensive. However, this protectionism comes at a cost. When tariffs increase the prices of goods, consumers tend to reduce their spending.
Consumer spending drives approximately 68% of the US GDP, so any sustained reduction in consumption can push overall economic activity below the threshold necessary to avoid a recession. Employment would also be significantly affected, with the proposed 25% tariffs potentially resulting in a 0.25% job loss in the US, and up to 3% job losses in both Canada and Mexico.
The imposition of these tariffs could have serious spillover effects. Analysts at Deutsche Bank have argued that sustained tariffs against Canada and Mexico, two of the United States’ largest trading partners, will have a far larger economic impact than the repercussions of Brexit on the United Kingdom.
The Trade War and Its Broader Impact
Many stakeholders anticipated that these moves would negatively affect international trade flows, increase production costs, and drive up prices across the board. As domestic and international companies scramble to adjust supply chains, the uncertainty that accompanies such policy shifts can further depress economic activity.
Last week, crypto markets experienced the volatility induced by these policies. When Trump agreed to postpone Canada and Mexico tariffs by a month, Bitcoin’s price recovered from $92,000 to over $100,000. However, the relief was short-lived when China retaliated with its own set of tariffs, and the cryptocurrency’s price retracted to around $96,000 within hours. This rapid on-off dynamic highlights how sensitive markets have become to tariff-related news.
Inflation Risks and the Federal Reserve’s Dilemma
Federal Reserve officials have also voiced concerns about the inflationary potential of large-scale tariffs. While they have stopped short of explicitly linking these policies to their forthcoming monetary policy decisions, the warnings are significant.
Earlier, Chicago Fed President Austan Goolsbee voiced a number of supply chain threats regarding the implementation of tariffs. Tariffs increase import costs, and as these costs are passed on to consumers, inflation then accelerates.
This scenario is concerning, given that inflation erodes real incomes and can exacerbate recessionary pressures by reducing overall consumer spending. The Fed’s dilemma is acute. On one hand, the central bank seeks to control inflation by tightening monetary policy. However, an overly aggressive stance on interest rates could compound the negative effects of tariff-induced economic slowdowns.
Gold as a Safe-Haven Asset
While digital assets like Bitcoin have struggled to maintain stability amid rising trade tensions, traditional safe-haven assets have experienced a renewed surge in demand. According to data from The Kobeissi Letter, gold reached an all-time high on February 3.
The rally in gold prices reflects investors’ instinct to seek refuge amid heightened market volatility and inflationary pressures. The dynamics behind this shift are rather simple. As tariffs push up consumer prices and undermine global trade, investors have become wary of the long-term economic outlook.
With the risk of recession and the possibility of further monetary tightening, gold’s relative stability makes it an attractive asset.
The coming weeks will be crucial. If the US continues its aggressive tariff imposition without achieving meaningful trade concessions, we may see increased inflation and sustained market volatility.
At the same time, we could anticipate the onset of recession in key partner economies. Policymakers, as well as investors, must recognize that the costs of trade protectionism extend far beyond the immediate sphere of international commerce.
While some may argue that these tariffs could eventually force a renegotiation of trade terms, the evidence suggests that the risk of recession, and the attendant damage to consumer confidence and global liquidity, is too great to ignore.
Agne Linge is a head of growth and board member of WeFi, with a robust background in the crypto, DeFi, and fintech sectors. She brings over eight years of experience in the crypto industry, complemented by more than ten years in consulting, where she has honed her skills in advisory services, strategic planning, and business development. Her expertise spans blockchain technologies, including Layer-1s and Layer-2s, as well as centralized and decentralized exchanges and DeFi protocols. With a solid foundation in traditional finance, Agne’s hands-on experience in crypto and DeFi positions her as a knowledgeable voice in the field. She is an active participant in the crypto community, with a vast network that fosters collaboration and innovation. A sought-after speaker, Agne regularly presents at major global conferences, including Devcon, ETH Denver, and ETH Barcelona. Her previous roles as a director at Binance and head of communications at DeGate further highlight her influential presence in the evolving landscape of digital finance.
