Grayscale's latest research report: Tariffs, stagflation and Bitcoin
Bnews editor
This article analyzes the impact of recent changes in the US global tariff policy on financial markets, especially the unique performance of Bitcoin in this process; explores the long-term impact of tariffs on the economy, especially the choice of asset allocation during stagflation, and the performance of Bitcoin and gold in this environment; analyzes the impact of current trade tensions on the US dollar and the potential adoption of Bitcoin, and finally looks forward to the economic outlook in the next few years, pointing out that scarce commodity assets such as Bitcoin and gold may usher in more attention and demand in a high inflation environment.
Since the announcement of the new global tariff policy by the United States on April 2, global asset prices have fallen sharply, and only gradually recovered after Trump announced the suspension of tariffs this morning (except China). However, the initial tariff announcement affected almost all assets, and during this period, Bitcoin's decline was relatively small on a risk-adjusted basis. Therefore, if Bitcoin has a 1:1 correlation with stock market returns, a decline in the S&P 500 should mean a 36% decline in Bitcoin prices. However, the actual situation is that Bitcoin has only fallen by 10%, highlighting that holding Bitcoin as part of a portfolio can still bring significant diversification benefits even when the market experiences a deep pullback.
After risk adjustment, the decline in Bitcoin prices is relatively small
In the short term, the outlook for global markets will likely depend on trade negotiations between the White House and other countries. While negotiations may lead to lower tariffs, setbacks in negotiations may also trigger more retaliatory actions. Actual and implied volatility in traditional markets remains high, making it difficult to predict how trade conflicts will evolve in the coming weeks. Therefore, investors should adjust their positions carefully in a high-risk market environment. In addition, the increase in Bitcoin's price volatility is much lower than that of stocks, and multiple indicators show that speculative traders in the cryptocurrency market have relatively low positions. If macro risks ease in the coming weeks, the market value of cryptocurrencies should be expected to rebound.
The implied volatility of stocks is close to that of Bitcoin
Regarding Bitcoin, although its price has fallen in the past week, the impact of higher tariffs on Bitcoin in the longer term will depend on its impact on the economy and international capital flows. Tariffs (and changes in non-tariff trade barriers associated with them) may lead to "stagflation" and may lead to structural weakness in demand for the US dollar, so in this case, increased tariffs and changes in global trade patterns may be positive factors for Bitcoin adoption in the medium and long term.
Asset Allocation in Stagflation
Stagflation refers to an economic state in which economic growth is slow/slowing and inflation is high/accelerating. Tariffs raise the price of imported goods and therefore (at least in the short term) lead to higher inflation. At the same time, tariffs may also slow economic growth by reducing real incomes for residents and adjusting costs for businesses. In the long run, this effect may be partially offset by increased domestic manufacturing investment, and most economists expect these new tariffs to remain a drag on the economy for at least another year.
From a historical perspective, the asset returns in the 1970s most vividly demonstrate the impact of stagflation on financial markets (Bitcoin has been around too long to backtest its performance). During that decade, US stocks and long-term bonds both returned an annualized rate of about 6%, which was lower than the average inflation rate of 7.4% at the time. In contrast, the price of gold rose by about 30% annually, far exceeding the inflation rate.
Traditional assets had negative real returns in the 1970s
Typically, extreme periods of stagflation are rare, but their impact on asset returns is roughly consistent over time. The chart below shows the average annual returns of US stocks, government bonds, and gold in different economic growth and inflation cycles from 1900 to 2024.
Stagflation reduces stock returns and increases gold returns
Historical data reveals three key points:
Stock market returns generally improve when GDP is high or accelerating and inflation is low or slowing. Therefore, during periods of stagflation, stock market returns fall as expected and investors may need to reduce equity allocations;
Gold tends to perform better when economic growth is sluggish and inflation is rising, especially during periods of stagflation, when gold becomes the main tool for hedging inflation. This shows that gold is generally a more attractive investment option in this environment;
Bond performance is closely related to changes in inflation. Bond returns generally perform better when inflation is low, and perform worse when inflation rises. Therefore, bond investors may face the risk of declining returns during periods of rising inflation.
In summary, different assets perform differently during economic cycles, and investors should adjust their asset allocation according to the macroeconomic environment. Periods of stagflation are particularly important because they tend to have a negative impact on stocks, while gold may usher in growth.
Bitcoin and the US Dollar
Tariffs and trade tensions could drive Bitcoin adoption in the medium term, in part because of pressure on demand for the US dollar. Specifically, if overall trade flows with the US fall, and much of that trade is denominated in US dollars, then there will be less demand for transactions in the US dollar. Moreover, if tariffs also lead to conflicts with other major countries, then they could weaken demand for the dollar as a store of value.
The dollar accounts for a much larger share of global foreign exchange reserves than the US accounts for global economic output. There are many reasons for this, but network effects play a big role: countries trade with the US, borrow in US dollar markets, and typically export commodities denominated in US dollars. If trade tensions lead to weaker links with the US economy/dollar-based financial markets, countries could accelerate the diversification of their foreign exchange reserves.
The dollar accounts for a much larger share of global reserves than the US accounts for the global economy
Many central banks have stepped up their gold purchases in the wake of Western sanctions against Russia. No central bank in any other country, other than Iran, is known to hold Bitcoin on its balance sheet. However, the Czech National Bank has begun exploring this option, the US has also established a strategic Bitcoin reserve, and some sovereign wealth funds have publicly announced investments in Bitcoin. In our view, disruptions to the dollar-centric international trade and financial system could lead to further central bank reserve diversification, including investments in Bitcoin.
The most similar moment in U.S. history to President Trump’s “Liberation Day” announcement may be the “Nixon Shock” of August 15, 1971. That evening, President Nixon announced a 10% tariff across the board and an end to the dollar’s convertibility into gold, a system that had underpinned the global trade and financial system since the end of World War II. The action triggered diplomacy between the United States and other countries, culminating in the Smithsonian Accord in December 1971, where other countries agreed to appreciate their currencies relative to the dollar. The dollar ultimately depreciated by 27% between the second quarter of 1971 and the third quarter of 1978. Over the past 50 years, several rounds of trade tensions have been followed by (partially negotiated) dollar weakness.
The recent trade tensions are expected to lead to continued dollar weakness again. According to relevant indicators, the U.S. dollar is already overvalued, the Federal Reserve has room to cut interest rates, and the White House wants to reduce the U.S. trade deficit. Although tariffs change effective import and export prices, a depreciating dollar may achieve the desired effect by gradually rebalancing trade flows through market mechanisms.
Child of the Times-Bitcoin
The sudden change in US trade policy is causing financial markets to adjust, which will have a short-term negative impact on the economy. 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 effects on GDP growth, inflation, and the trade deficit. For example, while tariffs may reduce economic growth and increase inflation (i.e., cause stagflation), certain types of deregulation may increase growth and reduce inflation (i.e., reduce stagflation), and the final result will depend on the extent to which the White House implements its policy agenda in these areas.
US macroeconomic policies will have a range of effects on growth and inflation
Despite the uncertainty in the outlook, the best guess is that the US government's policies will lead to continued dollar weakness and overall above-target inflation over the next 1 to 3 years. Tariffs themselves may slow growth, but this effect may be partially offset by tax cuts, deregulation, and a depreciating dollar. If the White House also actively pursues other growth-promoting policies, GDP growth may remain relatively good despite the initial impact of tariffs. Regardless of whether actual growth is strong or not, history suggests that a period of sustained inflationary pressures can be bullish for scarce commodities like Bitcoin and gold.
Moreover, like gold in the 1970s, Bitcoin today has a rapidly improving market structure—supported by policy changes in the U.S. government. So far this year, the White House has implemented a wide range of policy changes that should support investment in the digital asset industry, including the withdrawal of a series of lawsuits, ensuring the suitability of assets for traditional commercial banks, and allowing regulated institutions (such as custodians) to provide cryptocurrency services. This, in turn, has triggered a wave of M&A activity and other strategic investments. The new tariffs are a short-term headwind to the valuation of digital assets such as Bitcoin, but the Trump administration's cryptocurrency-specific policies have been supportive of the industry. Taken together, rising macroeconomic demand for scarce commodity assets and an improving investor operating environment could be a potent combination for widespread Bitcoin adoption in the coming years.
