The tariff announcements hit the market hard, causing exchanges to panic and stock and crypto prices to plummet. However, there are signs that tariffs are accelerating Bitcoin’s rise as a global reserve currency despite the crypto market losing around $300 billion since 4 April. Nevertheless, the Bitcoin Dominance Index (the Bitcoin share of all values in the crypto market) has risen to 62 per cent and has thus reached the level of 2020. It looks like the market is recovering, as a low dominance index indicates speculative overheating.
The global economy is in upheaval and Bitcoin is not playing a contrary role in this because Bitcoin reacts more like a cyclical security. From a monetary perspective, it is difficult to understand Trump’s policy. The US is in the remarkable position of being the only country in the world that can export paper at the price it prints on it. The US dollar is still the liquid and generally accepted currency that is indispensable for foreign trade.
But Trump thinks the whole world is taking advantage of the USA. The USA has a large trade deficit with most countries and this is not a miracle, but the natural and desirable consequence of being able to export money. Trump now wants to reduce this imbalance with new tariffs. The aim is to balance the national budget through tariffs and job cuts without having to raise more taxes. Trump wants a budget in which debt servicing is no longer a burden on the budget and the USA can borrow money on favourable terms. This would strengthen the ability to act and allow the central bank to stimulate the economy by cutting interest rates without having to fear inflation. The expectation of rising prices has a negative impact on cryptocurrencies. If people have to pay more for everyday things, there will be less money to invest in cryptocurrencies. Inflation due to too much money is good for cryptocurrencies, inflation due to too few goods triggered by new customs tariffs is bad.
Tariffs not only have an inflationary effect, they also push consumers and small businesses to their limits. They drive up prices for essential everyday goods, reduce profits, clog up supply chains and could trigger trade wars and disrupt the global flow of goods. The new tariff strategy is not just an irresponsible tactic as it could trigger fiscal instability in the USA, as illustrated by the interest rates on US government bonds. Interest rates for bonds with a ten-year term fell to a low of four per cent at the beginning of April, but have risen rapidly to around 4.46 per cent in recent days.
This is good news for some stablecoin issuers, as they mainly cover their coins with government bonds. There is also speculation that China is selling US government bonds in the tariff dispute. Thanks to a long-standing trade surplus, China holds US government bonds worth over 1.6 trillion dollars. Japan’s central bank also holds USD 1 trillion worth of US government bonds in its reserves and the Asian tiger economies hold around USD 700 billion worth. If all these countries were to sell small portions of their US government bonds, the USA would effectively be bankrupt and Trump’s new tariff strategy would have failed. However, as the dollar is still the global reserve currency, a US bankruptcy can be ruled out.
All central banks are hoarding US government bonds, which can not only exchange their intrinsically worthless paper for goods, but also enjoy an endless credit line. Trump is jeopardising this position with his actions in order to reduce the US debt. He sees the US trade deficit as a problem that needs to be solved. He sees the dollar system as a problem and accuses other countries of taking advantage of the US by using the dollar as a reserve currency.
Until now, central banks have accumulated dollars, bonds and shares as a result of trade surpluses. When companies export goods, they receive dollars in return, but have to exchange them for the local currency. The central bank ensures liquid currency markets and buys up the companies’ dollars. Most central banks keep the dollars that flow to them in this way because they provide a stable reserve and are necessary for imports. In addition, selling the dollar reserves would increase the value of their own currency and thus harm exports.
The dollar’s position as a global reserve currency is closely linked to the US trade deficit. Without this, central banks will hold fewer dollars in future. They may have to liquidate dollars from their reserves in order to supply the import economy with foreign currency. Should such sales occur, there is a threat of a gigantic sale of US securities and the interest rates on US government bonds would explode and with it the level of debt. It could be that the USA will relinquish its claim to monetary leadership and want to defend itself against the trade deficit. Trump’s policy could set in motion and accelerate the process that China, Russia and Brazil want in vain. A trade war could thus trigger a spiral of devaluation.
The uncertain global outlook is an indication of a crash, which will be good for cryptocurrencies. If the dollar system were to be abolished, there would be a gap that cryptocurrencies, and Bitcoin in particular, could fill as a new reserve currency. If fiat currencies depreciate to force export surpluses, cryptocurrencies will gain new value and if the global economy shrinks and central banks counteract by lowering interest rates, cryptocurrencies and Bitcoin in particular will benefit from the liquidity. Perhaps the markets are currently confirming BlackRock CEO Larry Fink, who warned in January that the dollar was in danger of losing its reserve currency status to digital assets such as Bitcoin if the US did not get its debt under control.
Trump’s tariff strategy makes this possibility more real and more urgent. If you have the option to replace a debt-driven monetary system with one in which assets are transferable in real time, borderless and uncorruptible – why not do it? Matthew Sigel, an analyst at Bitcoin-invested asset manager VanEck, also believes that the customs strategy is positive for Bitcoin. This strategy has exacerbated global trade tensions and threatens to trigger monetary and monetary policy fragmentation. If tariffs limit economic growth, the Fed could respond with the interest rate policy that has always boosted Bitcoin; at the same time, the strategic approach to trade and finance is driving demand for a neutral settlement instrument. This is not just theory, as China and Russia have already begun balancing energy trade with Bitcoin and other digital assets, while Bolivia has already announced its intention to import energy through crypto and in Europe the French electricity supplier EDF wants to mine Bitcoins with surpluses. Bitcoin is apparently becoming increasingly important in the global economy!
Source : FOOTTOK AG / Jürg Fausch
