Tariff wars, stagflation, and BTC: BTC is increasingly resembling gold from the 1970s.

Source: Grayscale Research; Translation: Golden Finance xiaozou

The price of Bitcoin has continued to decline since the White House announced new reciprocal tariffs, but we believe that tariff policies and trade tensions will ultimately form a long-term benefit for it.

First, high tariffs promote stagflation, which often negatively impacts traditional asset returns but benefits scarce commodities like gold. Although Bitcoin has not experienced past stagflation cycles, it is increasingly seen as a modern store of value as a digital scarce commodity. Second, trade frictions may weaken the dollar’s status as a reserve currency, prompting central banks around the world to diversify their foreign exchange reserves, and Bitcoin, as a non-sovereign asset, may benefit from this.

Despite the extremely high short-term policy uncertainty, we believe that long-term investors should position themselves for a portfolio that benefits from the continued depreciation of the dollar and excessive inflation - this is consistent with market characteristics during periods of severe trade conflicts in American history.

Bitcoin is likely to benefit from this macro environment, which may explain why it has outperformed the stock market in terms of risk-adjusted returns during the recent market downturn. Additionally, similar to gold in the 1970s, Bitcoin’s current market structure is rapidly improving under the support of changes in U.S. government policy, which could broaden its investor base.

Since the White House announced new global tariffs on April 2, the price of Bitcoin has experienced a moderate decline. On April 9, the asset market partially recovered due to the announcement of a 90-day suspension of tariffs on countries outside of China, but the initial tariff announcement had caused nearly all assets to drop. After adjusting for risk, Bitcoin’s decline was relatively small (see the chart below). For example, from April 2 to 8 (before the 90-day suspension announcement), the S&P 500 index fell about 12%, while Bitcoin only dropped 10%—considering its volatility is typically three times that of the S&P, this translates to an equivalent decline of 36%, highlighting the diversification value of Bitcoin in a portfolio. Since the announcement of reciprocal tariffs, after the partial rebound in the market on April 9, both the S&P 500 index and Bitcoin have fallen by about 4%.

In the short term, the direction of the global market may depend on trade negotiations between the White House and other countries. While negotiations may lower tariffs, a breakdown in talks could trigger more retaliatory measures. Both actual and implied volatility in traditional markets are at high levels, and the evolution of the trade conflict over the coming weeks is difficult to predict (see chart below). Investors need to pay attention to position management in a high-risk environment. However, it is worth noting that Bitcoin’s volatility increase is far lower than that of the stock market, and several indicators show that speculative positions in the crypto market are at low levels. We believe that if macro risks ease in the coming weeks, the valuation of cryptocurrencies should rebound.

Apart from short-term effects, the long-term impact of tariffs on Bitcoin depends on the structural changes they cause to the economy. We believe that despite the decline in Bitcoin prices over the past week, the increase in tariffs and changes in the global trade landscape is beneficial for Bitcoin in the medium term. This is because tariffs (as well as changes related to non-tariff trade barriers) can lead to “stagflation”, and also because they may result in a structural decrease in demand for the US dollar.

1. Asset Allocation Stagflation‌‍‍‍‌‍‌‍‌‍‍‌‌‍‌‌‍‍‌‌‍‍‍‍‍‍‍‍‌‌‍‌‌‍‍‌‍‍‌‌‌‌‍‌‍‍‌‍‍‌‌‍‍‍‍

Stagflation refers to an economic state where GDP growth stagnates alongside rising inflation rates. Tariffs raise the prices of imported goods, driving up inflation, while simultaneously suppressing economic growth due to reduced household real income and increased adjustment costs for businesses. In the long run, this effect may be offset by increased investment in domestic manufacturing, but most economists expect that new tariff policies will lead to a higher risk of stagflation. Bitcoin is too young for us to know how it would perform during past historical events, but historical data suggests that stagflation often adversely affects the returns of traditional assets while benefiting scarce commodities like gold.

Historical experience shows that the asset returns in the 1970s vividly reflected the impact of stagflation on financial markets. During this period, the annualized return on U.S. stocks and long-term government bonds was only about 6%, below the average inflation rate of 7.4%. In contrast, the annual appreciation rate of gold prices was about 30%, far exceeding the inflation rate.

Although periods of stagflation are not always so extreme, the impact pattern on asset returns is persistent. The chart below shows the average annual returns of U.S. stocks, government bonds, and gold under different combinations of GDP growth and inflation from 1900 to 2024. The returns of different assets exhibit systematic changes throughout the economic cycle, which is a foundational view in macro investing.

Historical data shows that:

Stock returns are best when GDP growth accelerates and inflation is low. Therefore, during stagflation, stock returns are expected to decline, and investors may reduce their equity allocations.

When GDP growth slows down, bond yields tend to increase. The impact of inflation on bond returns is not very pronounced, partly because high inflation usually also means higher average yields (and higher cash rates). In terms of bond allocation, investors should consider whether the main effect of tariffs is that economic growth weakens or inflation rises.

Increased Gold Returns During Stagflation — This refers to periods of slowing GDP growth and accelerating inflation. Therefore, if the macroeconomic outlook indicates a higher risk of stagflation, investors may want to consider increasing their allocation to gold-related assets.

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Whether Bitcoin can appreciate in value during stagflation depends on whether investors view it as a scarce commodity akin to gold and a monetary asset. The fundamental characteristics of Bitcoin support this judgment, and we observe that institutional investors are increasing their allocations for this reason.

2. Bitcoin and USD

The tension in tariff trade may also promote the mid-term adoption of Bitcoin by weakening the demand for the dollar. Mechanically, if the total amount of trade with the U.S. measured in dollars decreases, it will directly reduce the demand for dollar transactions. More importantly, if tariff escalation leads trade partner countries to reduce their dollar reserves, it may accelerate the process of de-dollarization.

Currently, the proportion of the US dollar in global foreign exchange reserves far exceeds its share of the US economic output (see the chart below). This imbalance largely relies on network effects for maintenance. As countries with weaker ties to the US economy push for reserve diversification, Bitcoin, as a non-sovereign asset, may enter the central banks’ radar.

After Western sanctions were imposed on Russia, many countries’ central banks have increased their gold purchases. Currently, aside from the Iranian central bank, no central bank has publicly held Bitcoin, but the Czech central bank has begun relevant explorations, and the United States has recently established a Bitcoin strategic reserve. Some sovereign wealth funds have also disclosed Bitcoin investments. We believe that the disruption of the dollar-centered international trade and financial system may lead to greater diversification of central bank foreign exchange reserves (including Bitcoin).

The most comparable event in American history to Trump’s tariff declaration is the “Nixon Shock” on August 15, 1971. At that time, President Nixon suddenly announced a 10% surtax and terminated the dollar’s convertibility into gold, a system that had supported global trade and finance since the end of World War II. This move sparked a period of diplomatic negotiations between the United States and other countries, ultimately resulting in the Smithsonian Agreement in December 1971, under which other countries agreed to raise their currency exchange rates against the dollar. The dollar eventually depreciated by 27% between the second quarter of 1971 and the third quarter of 1978. Over the past 50 years, there have been several periods of trade tensions followed by a weakening of the dollar.

We expect that the recent period of trade tensions will be followed by a prolonged weakness of the dollar. The dollar may once again enter a phase of sustained decline. According to standard indicators, the dollar is overvalued, the Federal Reserve has room to cut interest rates, and the White House is working to reduce the U.S. trade deficit. Although tariff policies directly change the actual prices of imports and exports, the depreciation of the dollar is more likely to fundamentally achieve the policy’s expected goals.

3. Bitcoin in Our Era

The financial market is adapting to the abrupt changes in U.S. trade policy, and this adjustment will have a negative impact on the economy in the short term. However, the market conditions of the past week are unlikely to become the norm for the next four years. A series of policy measures implemented by the Trump administration will have differentiated impacts on GDP growth, inflation levels, and trade deficits (see the chart below). For example, while tariffs may suppress growth and raise inflation (i.e., exacerbate stagflation), deregulation in certain areas can stimulate growth and suppress inflation (i.e., alleviate stagflation). The result is that tax cuts, deregulation, and dollar depreciation can partially offset the impact of tariffs. If the White House simultaneously pushes for other more growth-oriented policies, GDP growth is still expected to remain relatively robust, even in the face of the initial shock from tariffs.

Despite the uncertain outlook, our prediction is that in the next 1-3 years, U.S. government policies will lead to a continued weakening of the dollar, with inflation generally above target. Tariffs themselves often slow growth, but their impact may be partially offset by tax cuts, deregulation, and the depreciation of the dollar. If the White House actively promotes other growth-friendly policies, despite the initial shock from tariffs, GDP growth may remain quite strong. Regardless of whether actual growth remains robust, history shows that persistent inflationary pressures are challenging for the stock market, but beneficial for scarce commodities like gold and cryptocurrencies.

Moreover, just like gold in the 1970s, Bitcoin has rapidly improved market structure today, supported by changes in U.S. government policy, which may help expand Bitcoin’s investor base. Since the beginning of the year, the current U.S. government has implemented several policy changes favorable to investments in the digital asset industry, including the withdrawal of multiple lawsuits, ensuring smooth asset channels for traditional commercial banks, and allowing custodians and other regulated entities to provide crypto services. These measures have triggered a wave of industry mergers and a surge in strategic investments. Although the new tariff policy has suppressed digital asset valuations in the short term, the Trump administration’s targeted support policies for cryptocurrencies continue to inject confidence into the industry. The rising demand for scarce commodity assets on a macro level and the improved investment environment on a micro level create a dual driving force, and this combination effect may strongly promote the large-scale adoption of Bitcoin in the coming years.