Outlook of the Crypto Market under the Changing Global Economy

Recently, the global economic situation has been turbulent. Although many people have already noticed this, it is still worth our in-depth exploration of some insights.

Although our main focus has always been on the crypto market, especially after the confirmation of a bull market rebound following the Bitcoin halving, the market currently seems to have entered a relatively calm phase. During this phase, most cryptocurrency holders have completed their investments, and maintaining a wait-and-see attitude may be a prudent strategy.

For most investors, adopting a long-term perspective can simplify the investment process and reduce the need for frequent adjustments. Currently, the best options seem to be either holding long-term or betting on emerging popular encryption assets.

Regardless, this calm period in the crypto market provides us with an opportunity to focus on the macroeconomy, which inevitably affects the crypto market. After all, Bitcoin and other cryptocurrencies are fundamentally influenced by macroeconomic trends. Although the crypto market currently appears stagnant, the macroeconomic environment is worth our in-depth exploration.

Today, we will focus on two closely related important economic events:

1. A certain country is dumping a large amount of U.S. Treasury bonds and agency bonds.
2. The United States announced a significant increase in tariffs on imported products from the country.

Let's delve into the analysis of these two events and their potential impacts.

For decades, a certain country has been steadily accumulating U.S. Treasury bonds, holding up to 10% of the U.S. national debt through bonds issued by the federal government. The reasons for doing so include:

• U.S. Treasury bonds are widely regarded as one of the safest investments in the world, offering reliable returns with very low risk. This is attractive for preserving the country's large foreign exchange reserves.
• The country exports a large number of goods to the United States, earning a substantial amount of dollars. Instead of holding these dollars, the country chooses to invest in U.S. Treasury bonds to earn interest.
• By purchasing U.S. debt, the country helps maintain the relative stability of its currency. This stability preserves the competitiveness of the country's exports, as a stable exchange rate makes its goods more affordable for U.S. consumers.

However, recently the country has been reducing its exposure to US debt. It has been reported that the country sold a record amount of US Treasury bonds and agency bonds in the first quarter. The US is naturally unhappy about this development for the following reasons:

• The large-scale sell-off increased the supply of US Treasury bonds in the market, leading to a decrease in their prices. Bond prices fell, and interest rates rose.
• Rising interest rates mean that the U.S. government needs to pay more in debt servicing costs. Initially, the sell-off of U.S. Treasuries may strengthen the dollar, as investors transfer funds into dollars to purchase the bonds being sold. However, over time, the increase in dollar supply may weaken the dollar. Moreover, a 10% gap is significant. Who will fill it? Japan? Given that Japan is also dealing with its own yen depreciation issues, we do not hold out much hope.
• Such actions may also affect the value of the dollar relative to the country's currency, making exports more expensive and potentially harming the country's economy. However, the country seems to be less concerned about this, as de-dollarization is their top priority.

How can the United States respond? The Federal Reserve may re-enter the debt market and resume quantitative easing (QE), even if interest rates remain above 5%. The U.S. government could also ask banks and other institutions to purchase more government bonds.

However, banks need to be compensated with higher yields, which may incentivize them to increase lending and could drive inflation.

Now, let's take a look at the second event: the United States announces a significant increase in tariffs on imported products from a certain country.

In response, it seems that the U.S. President has announced new and increased tariffs on imports from that country. These tariffs continue the punitive measures implemented by the previous administration, which the candidate had criticized at the time for burdening American consumers.

Tariffs on electric vehicles have increased more than fourfold to 100%; tariffs on lithium batteries and their components, as well as some steel and aluminum products, have increased more than threefold. In addition, tariffs on semiconductors and solar panels have doubled.

The new tariffs also apply to a long list of key minerals, magnets, shore-to-ship cranes, and medical products.

This measure aims to make the country's goods more expensive in the United States, thereby encouraging consumers to buy more American-made products. This strategy is expected to hit the country's manufacturers and exporters, potentially leading to a decrease in the country's income and an increase in unemployment.

However, there is a significant challenge. The United States currently does not have the capacity to increase domestic production like that country. To boost domestic activity, fiscal stimulus is needed to help businesses establish additional capacity to replace more expensive imported supplies. This essentially means more money issuance.

To offset these tariffs and "localize" the currently lacking industries, the necessary fiscal stimulus may be achieved through more government debt. Given that the U.S. economy is showing signs of slowing down, short-term reliance on GDP growth to cover these costs is not feasible.

Crypto Market Outlook

So how does all this affect Bitcoin and the crypto market? Aside from the possibility that escalating tensions could lead to socio-political instability, a slowdown in the global economy may reduce disposable income available for investing in cryptocurrencies, and this is already happening. In fact, these circumstances lead us to believe that there may be more fiscal stimulus and potential monetary issuance to support this conflict, while Bitcoin is often seen as a hedge against inflation.

Moreover, as governments around the world face economic challenges, the prevailing view that they would increase regulation on encryption has weakened, at least regarding Bitcoin. In fact, it seems to be quite the opposite, with more and more people appreciating its existence. In the long term, if the dollar depreciates due to increased debt and money supply, Bitcoin could benefit as an alternative currency.

Overall, despite the complex and variable current global economic situation, the crypto market, especially Bitcoin, may benefit from these macroeconomic changes in the long run. Investors should closely monitor global economic trends while maintaining long-term confidence in encryption assets.