Editor's Note: This article analyzes the recent changes in US global tariff policies and their impact on financial markets, particularly Bitcoin's unique performance; discusses the long-term economic effects of tariffs, especially asset allocation choices during stagflation, and the performance of Bitcoin and gold in such an environment; examines the impact of current trade tensions on the US dollar and potential Bitcoin adoption, and finally provides an outlook on the economic prospects for the coming years, suggesting that Bitcoin and scarce commodities like gold may receive more attention and demand in a high-inflation environment.
Since the US announced new global tariff policies on April 2nd, global asset prices plummeted, only gradually recovering after Trump's announcement of a tariff policy suspension (excluding China). However, the initial tariff announcement almost affected all assets, and during this period, Bitcoin's decline was relatively small when measured by risk-adjusted benchmarks. If Bitcoin's correlation with stock market returns were 1:1, the S&P 500's decline should have meant a 36% drop in Bitcoin price. In reality, Bitcoin only dropped by 10%, highlighting the significant diversification benefits of holding Bitcoin as part of an investment portfolio even during deep market retracements.
Bitcoin price decline was relatively small when risk-adjusted
In the short term, the global market outlook may depend on trade negotiations between the White House and other countries. While negotiations might lead to tariff reductions, setbacks could also trigger more retaliatory actions, with traditional market volatility remaining high and difficult to predict. Investors should cautiously adjust positions in this high-risk market environment. Moreover, Bitcoin's volatility increase is far lower than stocks, and multiple indicators show relatively low speculative trading positions in the cryptocurrency market. If macro risks ease in the coming weeks, cryptocurrency market capitalization is expected to rebound.
Stock implied volatility approaches Bitcoin's
Regarding Bitcoin, although its price has declined over the past week, from a longer-term perspective, higher tariffs' impact on Bitcoin will depend on their effect on the economy and international capital flows. Tariffs (and related changes in non-tariff trade barriers) might lead to "stagflation" and potentially cause structural weakness in US dollar demand. Therefore, increased tariffs and changes in global trade patterns could be positive factors for Bitcoin adoption in the medium to long term.
Asset Allocation during Stagflation
Stagflation refers to an economic state of slow/decelerating economic growth with high/accelerating inflation. Tariffs increase imported goods' prices, thus (at least short-term) causing inflation to rise. Simultaneously, tariffs might slow economic growth by reducing residents' real income and forcing businesses to adjust costs. Long-term, this impact might be partially offset by increased domestic manufacturing investment, with most economists expecting these new tariffs to continue dragging the economy for at least a year.
Historically, asset returns in the 1970s vividly demonstrated stagflation's impact on financial markets (Bitcoin emerged too recently for performance backtesting). During that decade, US stocks and long-term bonds had approximately 6% annualized returns, below the 7.4% average inflation rate. In contrast, gold prices rose about 30% annually, far exceeding inflation.
Traditional assets had negative real returns in the 1970s
Typically, extreme stagflation scenarios are rare, but their asset return impacts remain consistent over time. The following graph shows the average annual returns of US stocks, government bonds, and gold across different economic growth and inflation cycles from 1900 to 2024.
Stagflation reduces stock returns, increases gold returns
Historical data reveals three key points:
- When GDP is high or accelerating and inflation is low or decelerating, stock market returns typically increase. Thus, during stagflation, stock market returns are expected to fall, and investors might need to reduce equity allocations;
- When economic growth is sluggish and inflation rises, gold often performs well, especially during stagflation, serving as the primary inflation hedge. This suggests gold is typically a more attractive investment in such environments;
- Bond performance is closely tied to inflation changes. When inflation is low, bond yields are usually good, but when inflation rises, bond performance typically suffers. Therefore, bond investors might face reduced returns during inflationary periods;
- In summary, different assets perform differently across economic cycles, and investors should adjust asset allocation based on macroeconomic environments. Stagflation periods are particularly crucial, as they often negatively impact stocks while potentially benefiting gold.
Bitcoin and the US Dollar
Tariffs and trade tensions might promote Bitcoin adoption in the medium term, partly due to pressure on US dollar demand. Specifically, if total trade volume with the US decreases, and most trade is dollar-denominated, dollar transaction demand will reduce. Additionally, if tariffs cause conflicts with other major countries, they might weaken the dollar's store of value demand.
The US dollar's share in global foreign exchange reserves far exceeds the US's share in global economic output. This situation exists for many reasons, but network effects play a crucial role: countries trade with the US, borrow in dollar markets, and typically price commodity exports in dollars. If trade tensions reduce connections with the US economy/dollar-based financial markets, countries might accelerate foreign reserve diversification.
US dollar's share in global reserves far exceeds its share in global economy
Many central banks have increased gold purchases after Russia faced Western sanctions. Currently, apart from Iran, no other country's central bank holds Bitcoin on its balance sheet. However, the Czech National Bank has begun exploring this option, the US has established strategic Bitcoin reserves, and some sovereign wealth funds have publicly announced Bitcoin investments. We believe disruptions to the dollar-centric international trade and financial system might lead central banks to further diversify reserves, including investing in Bitcoin.
The moment most similar to President Trump's "Liberation Day" declaration in US history might be the "Nixon Shock" on August 15, 1971. That evening, President Nixon announced a comprehensive 10% tariff and ended the system of dollar convertibility to gold - a system that had supported the global trade and financial system since the end of World War II. This action triggered diplomatic activities between the United States and other countries, ultimately reaching the Smithsonian Agreement in December 1971, where other countries agreed to revalue their currencies relative to the US dollar. The US dollar ultimately depreciated by 27% between the second quarter of 1971 and the third quarter of 1978. In the past 50 years, there have been several rounds of trade tensions followed by a weakening of the US dollar (partially achieved through negotiations).
Recent trade tensions are expected to again lead to continued US dollar weakness. According to relevant indicators, the US dollar is already overvalued, the Federal Reserve has room to lower interest rates, and the White House hopes to reduce the US trade deficit. Although tariffs can change effective import and export prices, dollar depreciation may gradually rebalance trade flows through market mechanisms, thereby achieving the expected effect.
Child of the Times - Bitcoin
The sudden changes in US trade policy are causing adjustments in financial markets, which will have short-term negative economic impacts. However, the market conditions of the past week are unlikely to become the norm for the next four years. The Trump administration is implementing a series of policy measures that will have different impacts on GDP growth, inflation, and trade deficits. For example, while tariffs may reduce economic growth and increase inflation (causing stagflation), certain types of deregulation might increase growth and lower inflation (reducing stagflation), with the final result depending on the extent to which the White House implements its policy agenda in these areas.
US macroeconomic policies will have a range of impacts on growth and inflation
Despite the uncertainty, the best guess is that US government policies will lead to continued dollar weakness and inflation above the target in the next 1 to 3 years. Tariffs themselves may slow growth, but this impact could be partially offset by tax cuts, deregulation, and dollar depreciation. If the White House also actively pursues other growth-promoting policies, GDP growth may remain relatively good despite the initial tariff impact. Regardless of actual growth, historical evidence suggests that sustained inflationary pressures over a period may be favorable for scarce commodities like Bitcoin and gold.
Moreover, like gold in the 1970s, Bitcoin now has a rapidly improving market structure - supported by changes in US government policies. Since the beginning of the year, the White House has implemented a series of broad policy changes that should support investment in the digital asset industry, including withdrawing a series of lawsuits, ensuring asset applicability to traditional commercial banks, and allowing regulated institutions (such as custodians) to provide cryptocurrency services. This, in turn, has triggered a wave of mergers and acquisitions and other strategic investments. New tariffs are a short-term negative factor for Bitcoin's valuation, but the Trump administration's cryptocurrency-specific policies have consistently supported the industry. Overall, the increased demand for scarce commodity assets in the macroeconomic environment and the improved investor operating environment may be a powerful combination for widespread Bitcoin adoption in the coming years.
