Bitcoin has yet to establish itself as the secure asset many are hoping for.
For a brief period following President Donald Trump’s announcement of tariffs, it appeared that Bitcoin (BTC 0.41%) could maintain its composure while markets around it faltered. The stock market saw a drastic decline on April 3 and April 4, as investors and businesses began to assess the ramifications of the tariffs (which have since been suspended for three months).
During this time, Bitcoin fell by just over 1.5%, whereas the S&P 500 experienced a decline of more than 10%. It is uncommon for cryptocurrencies to show less volatility than stocks. However, Bitcoin did face challenges in the days that followed.
Let’s take a broader look at the potential impacts of tariffs, should they be enacted, on Bitcoin.
How Bitcoin Could Navigate the Tariff Storm
The full implications of tariffs on the economy and the U.S. dollar remain uncertain. Advocates for Bitcoin believe this could be an opportunity for the cryptocurrency to shine.
A trade war could result in increased inflation and a weakening of the U.S. dollar. Some analysts speculate that this might ultimately benefit Bitcoin. As Zach Pandl, head of research at Grayscale, mentioned to CoinDesk, “I think tariffs will diminish the dollar’s dominant role and create room for competitors like Bitcoin.”
Many consider Bitcoin to possess the potential as a form of digital gold – a secure asset against inflation. Similar to gold, Bitcoin is not controlled by any government, and only a limited quantity will ever be mined. However, Bitcoin’s resilience has not yet been proven. For instance, Bitcoin experienced a significant crash in 2022 when inflation reached a 40-year peak. Cryptocurrencies tend to behave more like tech stocks than like gold, and many argue that Bitcoin is too volatile to serve as a reliable hedge against inflation.
Nevertheless, we are currently navigating uncharted waters. Not only is the proposed 125% tariff on Chinese imports unprecedented, but Bitcoin is also more established and accessible compared to the 2018 U.S.-China trade conflict. This enhanced status may make it more appealing to investors seeking diversification.
Additionally, the effects of tariffs might be counterbalanced by other crypto-positive policies. The administration that initiated the tariffs has also implemented several pro-crypto measures, including:
- The creation of a Strategic Bitcoin Reserve and a digital asset stockpile
- Nominating Paul Atkins – a pro-crypto advocate – to lead the Securities and Exchange Commission
- Appointing David Sacks as the White House czar for artificial intelligence (AI) and crypto
How Tariffs Could Weigh Down Bitcoin
Conversely, a global recession would likely have a significant negative effect on Bitcoin’s price, especially in the short term. As fears of a recession rise, cryptocurrency prices are already feeling the strain.
Bitcoin generally struggles when investor sentiment declines. It faced setbacks during recessionary expectations in 2018 and again in 2022. Influential figures, like BlackRock‘s Larry Fink and JPMorgan Chase‘s Jamie Dimon, are already cautioning about an impending economic slowdown. The overall effects of a recession, inflation, and decreasing consumer confidence on Bitcoin’s price cannot be overstated.
One tangible way tariffs could impact the cryptocurrency sector is through Bitcoin mining. U.S. miners might find it more expensive to import equipment necessary for generating new Bitcoin. This could lead to reduced mining activities or even prompt some miners to relocate. Investors will need to monitor how any changes in the mining industry affect price and network security.
No Investment is Completely Tariff-Proof
If you’re in search of a safe asset during periods of market turmoil, Bitcoin is not the answer. While there are arguments for integrating a small percentage of Bitcoin into your investment portfolio, it remains a high-risk asset, and the current instability does not enhance its safety.
People might turn to cryptocurrencies if the shockwaves from tariffs significantly damage the global economy and traditional currencies. However, those same shockwaves could also lead to a substantial drop in Bitcoin’s price as investors steer clear of high-risk investments.
Avoid making emotional decisions regarding your investments – if you have a well-balanced portfolio and a long-term perspective, continue with it. Depending on your objectives and risk tolerance, you may choose to diversify with a small amount of Bitcoin. But only if you believe it holds value over the next decade or two.
JPMorgan Chase is an advertising partner of Motley Fool Money. Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and JPMorgan Chase. The Motley Fool has a disclosure policy.
