Tariffs: what do they mean for the crypto market?

Donald Trump has long promised to raise tariffs if re-elected, particularly targeting U.S. neighbors and economic competitors like China, Mexico, and Canada. On January 31st, the White House confirmed plans to impose 25% tariffs on Mexico and Canada (before temporarily suspending its decision), and 10% on China.

Although Trump calls tariffs “the most beautiful word in the [English] dictionary”, what do they really mean?

What Are Tariffs? 

At their core, tariffs are taxes on imports imposed by governments to either protect domestic industries or generate revenue. However, they are also a powerful economic tool, often used to control trade, influence markets, and even wage economic battles.

While tariffs aim to shield domestic businesses by making imported goods more expensive, they can also drive up local prices, contributing to inflation. Whether it’s the U.S.-China trade war, the EU’s carbon border tax, or the broader impact of protectionist policies, tariffs remain one of the most debated tools in economic policy.

To better understand how tariffs impact global trade and everyday life, we turned to James Butterfill, CoinShares’ Head of Research.

CoinShares: What are the main trade wars that occurred in the past and what kind of impact did they have?

James Butterfill: There have been many, but some of the biggest trade wars happened at the turn of the 20th century:

• The Dingley Tariff Act (1897): Raised import duties to 52%, boosting U.S. industry but harming consumers through higher prices and damaging trade relations.

• The Payne-Aldrich Tariff Act (1909): Intended to lower tariffs, but kept them high, deepening Republican Party divisions.

• The Fordney-McCumber Act (1922): Imposed record-high tariffs (over 40% in some cases), leading to economic retaliation from other countries.

Trade tariffs have generally been damaging for global growth. Even in the 1980s, U.S.-Japan trade tensions over car exports contributed to Japan’s asset bubble, which ultimately collapsed, causing decades of economic stagnation.

Whenever tariff wars are threatened, they tend to harm economic growth on a global scale.

What would be the impact of U.S. Tariffs increases? 

Let’s take Donald Trump at his word and assume he follows through on his promises regarding tariffs, immigration policies, and tax cuts. In that case, inflation could accelerate rapidly. However, the problem is that this would be bad inflation. For example, the cost of purchasing a German car in the U.S. would rise significantly, prompting consumers to rush their purchases before tariffs take effect. This surge in spending could temporarily boost retail sales, creating a false sense of economic strength in the U.S.

We've already seen early signs of this in the December inflation data. But this type of inflation is an unproductive force in the economy. Good inflation occurs when an economy is thriving—when rising prices are driven by increasing demand for goods and services. In contrast, what we’re seeing here is inflation driven by rising wages due to labor shortages (as immigration restrictions limit the supply of cheap workers) and higher costs from import taxes. This kind of inflation is inefficient and generally harmful to economic growth.

What impact can tariffs have on crypto? 

Cryptocurrencies have become a major part of the global economy, with over 580 million users worldwide as of January 2024 (according to Crypto.com). Given that Bitcoin is classified as a commodity in many countries, notably the United States, it’s worth examining how new U.S. tariffs could affect Bitcoin and the broader crypto market.

Once again, we asked James Butterfill for insights.

How would tariffs’ impact on the world also affect Bitcoin? 

James Butterfill: In the short term, tariffs would be negative for Bitcoin. Unlike gold, Bitcoin has a growth component, meaning it reacts to economic trends and liquidity cycles.

Initially, tariffs could:

• Slow economic growth, reducing demand for risk assets like Bitcoin.

• Increase inflation, which could lead to speculation on higher interest rates.

• Cause Bitcoin’s price to drop temporarily—as it often correlates with equities.

However, the long-term picture is different. At some point, the market will realize that the U.S. can’t keep raising interest rates while the economy weakens (stagflation). When that happens, Bitcoin will likely rebound, while stocks continue to struggle.

Right now, Bitcoin’s correlation with the NASDAQ is about 40%, well below its peak of 72%. But as we saw in March 2023, during the banking crisis, Bitcoin can decouple and act as a safe haven: this is the paradox of Bitcoin, it can be a volatile asset and a safehaven

In this particular context, should we consider Bitcoin as a different asset than the rest of digital tokens? 

J.B.Yes. Altcoins are much more growth-focused and closely tied to the tech industry.

For example:

• Ethereum and the NASDAQ have a higher correlation than Bitcoin and the NASDAQ.

• Ethereum and other altcoins fundamentally behave more like tech stocks, while Bitcoin is increasingly seen as digital gold.

This divergence is likely to continue, with Bitcoin behaving more like a hedge against economic uncertainty and altcoins remaining tied to the tech sector.

Some avenues to think about

Tariffs shape economies, dictate trade alliances, and can trigger trade wars, with ripple effects on global markets, supply chains, and consumer spending.

In the short term, higher U.S. tariffs could mean:

• Increased inflation and weaker economic growth.

• Volatility in Bitcoin and risky assets.

In the long term though, Bitcoin’s role as a hedge could strengthen, especially if tariff policies lead to economic instability.

One thing is certain: U.S. policy decisions will continue to influence global markets, and very much likely Bitcoin’s future.