Chain Reaction Caused by Tariff Policies: An Analysis of the Global Economy and Crypto Market Prospects

In an ordinary early morning, the introduction of a new tariff schedule caught the world off guard. This tariff strategy aims to reverse the long-standing trade imbalance, but its impact goes far beyond superficial adjustments in trade structure; it also involves deeper aspects of global capital flows and the operation of the U.S. Treasury market.

This policy mainly affects the following aspects:

1. Trade structure: High tariff policies aim to reduce imports and encourage domestic production, thereby narrowing the trade deficit. However, this approach may bring a series of side effects, such as rising import costs leading to increased inflationary pressure, and potential retaliatory tariffs from other countries, which could weaken U.S. exports. Although trade imbalances may be temporarily alleviated, the growing pains of supply chain restructuring and rising prices are difficult to avoid.

2. International capital flows: A decrease in U.S. imports means a reduction in the dollars flowing overseas, which could raise concerns about a "dollar shortage" globally. The dollar reserves in the hands of overseas trade partners are decreasing, and emerging markets may face liquidity tightening, leading to changes in the global capital flow patterns. During periods of dollar shortages, funds often flow back to the U.S. or shift towards safe-haven assets, which could impact the prices of overseas assets and the stability of exchange rates.

3. U.S. Treasury Supply and Demand: For a long time, the United States' massive trade deficit has led to a substantial amount of dollars held overseas, which typically flow back to the U.S. by purchasing U.S. Treasuries. Nowadays, tariff policies have compressed the outflow of dollars, resulting in a decline in foreign investors' ability to buy U.S. Treasuries. However, the U.S. fiscal deficit remains high, and the supply of government bonds continues to increase. If external demand weakens, who will take on the continuously emerging U.S. Treasuries? This may lead to rising U.S. Treasury yields, increased financing costs, and even the risk of insufficient liquidity.

Overall, this tariff policy is like drinking poison to quench thirst on a macro level: while it may temporarily fix trade imbalances, it undermines the dollar's circulation power globally. This adjustment of the balance sheet effectively shifts pressure from the trade account to the capital account, with the U.S. Treasury market being the first to bear the brunt. A blockage in macro capital flows will soon erupt elsewhere, and the Federal Reserve may have to be prepared with countermeasures.

In the face of the tightening supply of overseas dollars due to cooling trade, the Federal Reserve may have to step in to ease the pressure on dollar liquidity. When foreign investors are unable to purchase U.S. Treasuries due to a lack of dollars, the domestic central banks and banking system in the U.S. may become the only option to fill this gap. This means that the Federal Reserve may need to restart loose monetary policy.

In fact, the Chairman of the Federal Reserve has recently hinted at the possibility of restarting quantitative easing (QE) soon, with a focus on purchasing U.S. Treasuries. This indicates that officials are also aware that maintaining the operation of the Treasury market relies on additional dollar liquidity injections. In short, the dollar shortage can only be resolved through "massive monetary easing." The Federal Reserve's expansion of its balance sheet, lowering interest rates, and even utilizing the banking system to jointly purchase bonds are all measures that may be implemented soon.

However, this liquidity rescue is destined to face a dilemma: on one hand, timely injection of dollar liquidity can stabilize Treasury yields and alleviate the risk of market failure; on the other hand, large-scale monetary easing will eventually trigger inflation and weaken the purchasing power of the dollar. The supply of dollars shifts from tightening to flooding, and the value of the dollar will inevitably fluctuate violently. It is foreseeable that in this "first drain, then flood" roller coaster policy, the global financial market will experience a dramatic swing of the dollar from strength to weakness. The Federal Reserve has to seek a balance between stabilizing the bond market and controlling inflation, but it seems that ensuring stability in the Treasury market is the top priority, and "printing money to buy bonds" has become a political necessity. This also heralds a significant turning point in the global dollar liquidity environment: from tightening back to easing. Historical experience repeatedly proves that once the Federal Reserve opens the floodgates, funds will eventually flow into various sectors, including the crypto market among risk assets.

Compared to cryptocurrencies like Bitcoin, the Federal Reserve's signal to restart the money printer can almost be considered good news. The reason is simple: when the dollar floods the market and expectations of credit currency devaluation rise, rational capital will seek inflation-resistant safe havens, and Bitcoin is becoming the much-attentioned "digital gold." In this macro context, the limited supply of Bitcoin significantly increases its attractiveness, and its value support logic becomes unprecedentedly clear: when fiat currency continues to "devalue," hard currency assets will "appreciate."

The price of Bitcoin largely depends on the market's expectations for the future supply of fiat currency. When investors anticipate a significant expansion of USD supply and a decline in the purchasing power of paper money, safe-haven funds will flood into assets like Bitcoin that cannot be easily increased in supply. Looking back at 2020, after the Federal Reserve implemented large-scale QE, the simultaneous rise in the prices of Bitcoin and gold is clear evidence. If there is another round of quantitative easing this time, the crypto market is likely to repeat this scenario: digital assets will usher in a new wave of valuation increases. Some analysts predict that if the Federal Reserve shifts from tightening to large-scale money printing for government bonds, Bitcoin could surge to $250,000 by the end of the year. Although this prediction may be overly optimistic, it reflects the strong confidence among industry insiders in the "inflation dividend"—the additional printed currency will ultimately drive up the prices of scarce assets like Bitcoin.

In addition to the expectation of price increases, this round of macro changes will also strengthen the narrative of Bitcoin as "digital gold." If the Federal Reserve's easing leads to a lack of trust in the fiat currency system, the public will be more inclined to view Bitcoin as a store of value to hedge against inflation and avoid policy risks, just as people embraced physical gold during turbulent times in the past. It is worth noting that insiders in the crypto market have become accustomed to short-term policy fluctuations. As one investor stated: "If you sell Bitcoin because of 'tariff' news, it shows that you do not understand what you are holding at all." In other words, wise holders of Bitcoin know very well that the original intention of Bitcoin's creation was to combat the excessive issuance of currency and policy uncertainty; each instance of money printing and policy misstep further proves the value of holding Bitcoin as an alternative asset insurance. It can be anticipated that as expectations for dollar expansion increase and risk-averse capital increases its allocation, Bitcoin's image as "digital gold" will become even more deeply rooted in the minds of the public and institutions.

The significant fluctuations of the US dollar not only affect Bitcoin but also have a profound impact on stablecoins and the decentralized finance (DeFi) sector. Dollar stablecoins such as USDT and USDC serve as dollar substitutes in the crypto market, and their demand will directly reflect changes in investors' expectations regarding US dollar liquidity. In addition, the on-chain lending rate curve will also fluctuate with the macro environment.

In terms of demand for stablecoins, when the dollar is scarce, the offshore market often resorts to stablecoins to cope. When it is difficult to obtain dollars overseas, USDT may trade at a premium in the over-the-counter market, as people rush to grab this scarce resource known as digital dollars. Once the Federal Reserve engages in large-scale monetary easing, a portion of the newly added dollars is likely to flow into the crypto market, driving a massive increase in the issuance of USDT/USDC to meet trading and hedging demands. In fact, the issuance of stablecoins in recent months has already indicated that this trend has begun. In other words, regardless of whether the dollar strengthens or weakens, the rigid demand for stablecoins only increases: either due to a lack of dollars seeking alternatives, or because of concerns over fiat currency depreciation leading funds to temporarily shift to the blockchain. Especially in emerging markets and regions with strict regulations, stablecoins play the role of a substitute for the dollar, and every fluctuation in the dollar system ironically reinforces the presence of stablecoins as "crypto dollars." It is foreseeable that if the dollar enters a new cycle of depreciation, investors may rely even more on stablecoins like USDT to circulate in the cryptocurrency market to preserve their assets, thus driving the market value of stablecoins to new highs.

In terms of DeFi yield curves, the tightening or loosening of U.S. dollar liquidity will be transmitted to the DeFi lending market through interest rates. During periods of dollar scarcity, on-chain dollars become precious, and the borrowing rates for stablecoins soar, causing the DeFi yield curve to steepen (lenders demand higher returns). Conversely, when the Federal Reserve injects liquidity leading to an abundance of dollars in the market and traditional interest rates decline, the rates for stablecoins in DeFi become relatively attractive, thereby attracting more funds to flow on-chain to seek yields. Analysis reports indicate that under the expectation that the Federal Reserve may enter a rate-cutting cycle, DeFi yields are becoming attractive again, with the stablecoin market size rebounding to about $178 billion, and the number of active wallets stabilizing above 30 million, showing signs of recovery. As interest rates decline, more funds may shift on-chain in pursuit of higher yields, further accelerating this trend. Some analysts even predict that as the demand for crypto credit grows, the annualized yield of stablecoins in DeFi is expected to rebound to over 5%, surpassing the returns of U.S. money market funds. This means that DeFi has the potential to provide relatively better yields in a low-interest macro environment, thereby attracting the attention of traditional capital.

However, it is important to note that if the Federal Reserve's monetary easing ultimately leads to rising inflation expectations, the lending rates for stablecoins may also rise again to reflect the risk premium. Therefore, the yield curve in DeFi may be repriced in a "first down and then up" fluctuation: first flattening due to ample liquidity, and then steepening under inflationary pressure. But overall, as long as there is an oversupply of dollar liquidity, the trend of large amounts of capital flowing into DeFi in search of returns will be difficult to reverse, which will push up the prices of high-quality assets and lower the levels of risk-free interest rates, causing the entire yield curve to shift in favor of borrowers.

In summary, the macro chain reaction triggered by tariff policies will profoundly affect all aspects of the crypto market. From macroeconomics to dollar liquidity, and then to Bitcoin trends and the DeFi ecosystem, we are witnessing a butterfly effect: trade frictions trigger a currency storm, amidst the severe fluctuations of the dollar, Bitcoin is poised for action, while stablecoins and DeFi are facing opportunities and challenges in this changing situation. For astute crypto investors, this macro storm presents both risks and opportunities. Objectively, aggressive tariff policies have actually accelerated this process. Although the intent of the policy should not be over-interpreted, it currently appears to be the most positive and clear direction for development.