Written by: Matt Hougan, Chief Investment Officer at Bitwise; Jeff Park, Portfolio Manager and Head of Alpha Strategies
Compiled by: 0xjs@Jinse Finance
The cryptocurrency market has seen a significant pullback in the past few days, with Bitcoin dropping around 5% and many other assets seeing even larger declines. As I write this on Monday morning in London (where I'm attending a conference), Ethereum is down 17%, Solana is down 8%, and XRP is down 18%.
The immediate trigger for the pullback is concerns over the global trade war. Over the weekend, President Trump imposed 25% tariffs on most imports from Canada and Mexico, and 10% tariffs on China, and those countries have announced retaliatory plans. This has caused the US dollar to rise more than 1% against other major currencies, and has led to sharp declines in stock futures and cryptocurrency prices.
Of course, in the world of crypto, the trouble doesn't stop there.
In the cryptocurrency space, the widespread use of leverage often exacerbates market volatility, especially on low-liquidity weekends. Negative news events trigger price declines, which then force leveraged traders to liquidate their positions, causing further price drops and forcing more liquidations. This cycle continues until the leverage is exhausted.
Sure enough, in the 24 hours from Sunday night to Monday morning, we saw the largest liquidation event in cryptocurrency history, with potentially up to $10 billion in leveraged positions being unwound.
Bitwise investors tend to be long-term investors, so these short-term, leverage-driven pullbacks are seen by most as opportunities rather than threats - as long as the news events are truly short-term in nature.
But is that the case? That's a trillion-dollar question.
My colleague Jeff Park, who leads Bitwise's Alpha team, is one of the sharpest minds at the intersection of macro and crypto. His view is that Trump's economic gamesmanship, including the imposition of tariffs, is actually a long-term positive catalyst for Bit.
Here's what Jeff has to say:
The outcome is: Bit wins, fiat loses. Either way, Bit goes higher.
To understand the long-term impact of tariffs on Bit, you need to remember two things: 1) the curse of the Triffin dilemma, and 2) President Trump's long-term goals.
First, the Triffin dilemma. This dilemma, named after the Belgian-American economist who proposed the concept in the 1960s, is that being the world's reserve currency has both benefits and drawbacks.
On the negative side, the US dollar is structurally overvalued because other countries need to hold it as a reserve currency (regardless of its price), and the US must run persistent trade deficits to supply the world with dollars. On the positive side, the US government can borrow at persistently lower costs than "should" be the case, because there is a constant buyer of its debt.
Trump wants to eliminate the negatives while retaining the positives.
How does Trump plan to achieve this? Tariffs.
Tariffs are typically a temporary negotiating tactic to achieve a goal - and that seems to be the case here. We believe the ultimate goal is a multilateral agreement that weakens the dollar without raising long-term interest rates. One way to do this is to force countries to reduce their dollar reserves, while also extending the maturity of their Treasury holdings. This would suppress long-term rates while supporting the US manufacturing base.
But how do you get countries to agree to this? You have to force them to the negotiating table.
The US has done this before. In 1985, Germany, France, the UK, and Japan signed the Plaza Accord, which required an orderly decline in the US dollar. This agreement was a huge boost for US manufacturers, who had been struggling to compete globally due to the strong dollar. (Why did those countries sign the agreement? One reason was - you guessed it - fear of tariffs.)
If Trump can bully his way to this outcome, there is no better asset than Bit. Lower rates will stoke risk appetite among US investors, driving up the price of Bit. Abroad, countries will face economic weakness and turn to traditional monetary stimulus to compensate, further boosting the price of Bit.
What if he fails? What if we face a prolonged tariff war? We believe the resulting economic weakness will lead to money printing on a scale greater than ever before. Historically, this type of stimulus has been very positive for Bit.
