Tariffs, Quantitative Easing, and Digital Gold: A Forward Look at the Cryptocurrency Market in the Face of Fragile Conditions

Macroeconomic Impact: Trade Structure, Capital Flows, and Supply-Demand of U.S. Treasury Bonds

At 4 a.m., Trump confidently presented the new tariff list, catching the world off guard. Everyone must have witnessed what happened last night. Trump once again wielded the tariff stick, intending to reverse the long-standing trade imbalance. This tariff strategy may reshape the U.S. trade structure and capital flows in the short term, but it also hides new shocks to the U.S. Treasury market, primarily because the tariff policy may lead to a decline in foreign demand for U.S. Treasury bonds, and the Federal Reserve may need more monetary easing policies to maintain the operation of the Treasury market. So, is there any hope for everything shattered by the tariff policy? How can it be saved? And how should we view it?

Specifically, there are several aspects:

• Trade Structure: High tariffs aim to reduce imports and encourage domestic production, thereby narrowing the trade deficit. However, the "pain relief" approach often comes with side effects: rising import costs may push up inflationary pressures, and if other countries implement retaliatory tariffs, it will weaken U.S. exports. The trade imbalance may be temporarily alleviated, but the pain of supply chain restructuring and rising prices is inevitable. As the saying goes, pressing down on the trade deficit may cause inflation to surface.
• International Capital Flows: When U.S. imports decrease, it means fewer dollars flowing overseas—"no exports, no dollars," raising concerns about a dollar shortage globally. With reduced dollar reserves in the hands of overseas trading partners, emerging markets may face liquidity tightening, thus changing the global capital flow pattern. During a dollar shortage, funds often flow back to the U.S. or hide in safe-haven assets, impacting overseas asset prices and exchange rate stability.
• Supply-Demand of U.S. Treasury Bonds: For years, the U.S. massive trade deficit has led to substantial dollar holdings overseas, which are often funneled back to the U.S. through the purchase of Treasury bonds. Now, tariffs are compressing dollar outflows, leaving foreign investors with insufficient "ammunition" to buy U.S. Treasury bonds. However, the U.S. fiscal deficit remains high, with Treasury supply increasing. If external demand weakens, who will take on the continuously emerging U.S. Treasury bonds? The likely result is rising Treasury yields, increased financing costs, and even the risk of liquidity shortages. Trump’s attempt to balance the trade account may inadvertently tear down one wall to build another, laying new hidden dangers.

In summary, the tariff policy macroscopically resembles drinking poison to quench thirst: it temporarily fixes the trade imbalance but weakens the dollar's circulation power globally. This balance sheet shift is akin to transferring pressure from the trade account to the capital account, with the U.S. Treasury market bearing the brunt. A blockage in macro funds will soon erupt elsewhere—the Federal Reserve must be ready with fire hoses to extinguish the flames.

Dollar Liquidity: Reduced Exports Trigger Dollar Shortage, Fed Restarts "Brrrr"

As overseas dollar supply tightens due to cooling trade, the Federal Reserve will inevitably step in to ease dollar liquidity. As mentioned above, if foreigners don't earn dollars, they can't buy U.S. Treasury bonds. Arthur Hayes noted that "the only ones left to fill the gap are the U.S. central bank and banking system" (Arthur Hayes: Tariff policy may lead to a decline in foreign demand for U.S. Treasury bonds, and the Fed may need more monetary easing policies to maintain the operation of the Treasury market - PANews.) What does this mean? In crypto terms, it means the Fed's printing press will soon echo with the sound of "Brrrr." https://x.com/CryptoHayes/status/1907698822752694342

In fact, Fed Chairman Powell has already hinted at potentially restarting quantitative easing (QE) soon, with a focus on purchasing U.S. Treasury bonds. This statement confirms that the authorities also realize that maintaining the operation of the Treasury market relies on additional dollar liquidity injections. Simply put, the dollar shortage can only be resolved by "flooding the market." The Fed's balance sheet expansion, interest rate cuts, and even the use of the banking system to jointly purchase bonds are all on the table.

However, this liquidity firefighting is bound to come with dilemmas: on one hand, timely injection of dollar liquidity can stabilize Treasury yields and alleviate market failure risks; on the other hand, excessive liquidity will eventually breed inflation, weakening the dollar's purchasing power. The dollar supply will shift from tight to abundant, causing significant fluctuations in its value. It is foreseeable that in the roller coaster of "first draining, then flooding," global financial markets will experience a dramatic swing from a strong (scarce) dollar to a weak (overabundant) dollar. The Fed must walk a tightrope between stabilizing the bond market and controlling inflation, but currently, ensuring the stability of the Treasury market is a top priority, and "printing money to buy bonds" has become a politically inevitable choice. This also marks a significant turning point in the global dollar liquidity environment: from tightening back to easing. Historical experience repeatedly proves that once the Fed opens the floodgates, the flood will eventually flow to every corner—including the risk asset realm, including the crypto market.

Impact on Bitcoin and Crypto Assets: Inflation Hedge and the Rise of "Digital Gold"

The signal of the Fed restarting the printing press is almost a blessing for Bitcoin and other crypto assets. The reason is simple: when the dollar floods the market and expectations of credit currency depreciation rise, rational capital will seek inflation-resistant reservoirs, and Bitcoin is the much-anticipated "digital gold." The limited supply of Bitcoin becomes even more attractive in this macro context, and its value support logic has never been clearer: as fiat currency continues to "lighten," hard currency assets will "weigh heavier."

As Arthur Hayes pointed out, the price of Bitcoin "depends entirely on the market's expectations for future fiat currency supply" (Bitcoin price can hit $250K in 2025 if Fed shifts to QE: Arthur Hayes). When investors expect a significant expansion of dollar supply and a decline in the purchasing power of paper currency, safe-haven funds will flock to Bitcoin, an asset that cannot be over-issued. Looking back at 2020, after the Fed's massive QE, the simultaneous rise of Bitcoin and gold is clear evidence. If the floodgates are opened again, the crypto market is likely to replay this scene: digital assets will welcome a new wave of valuation uplift. Hayes boldly predicts that if the Fed shifts from tightening to printing money for Treasury bonds, Bitcoin may have already bottomed out at around $76,500 last month and will rise all the way to challenge the astronomical price of $250,000 by the end of the year. Although this prediction is aggressive, it reflects the strong confidence of crypto KOLs in the "inflation dividend"—the extra printed money will ultimately raise the prices of scarce assets like Bitcoin.

In addition to the expectation of price increases, this macro upheaval will also reinforce the narrative of "digital gold." If the Fed's easing triggers market distrust in the fiat currency system, the public will be more inclined to view Bitcoin as a store of value against inflation and policy risks, just as people embraced physical gold in past chaotic times. It is worth mentioning that insiders in the crypto circle have long been unfazed by short-term policy noise. As investor James Lavish sharply satirized: "If you sell Bitcoin because of 'tariff' news, it shows you don't understand what you hold" (Bitcoin (BTC) Price: Does Selling Still Make Sense?). In other words, savvy holders know that Bitcoin was born to combat over-issuance and uncertainty; every instance of money printing and policy misstep further proves the value of holding Bitcoin as alternative asset insurance. It is foreseeable that as expectations for dollar balance sheet expansion rise and safe-haven funds increase their allocations, Bitcoin's "digital gold" image will become more deeply rooted in the minds of the public and institutions.

Potential Impact on DeFi and Stablecoin Markets: Demand for Stablecoins and Yield Curve under Dollar Volatility

The significant fluctuations in the dollar not only affect Bitcoin but also have far-reaching impacts on stablecoins and the DeFi sector. Dollar stablecoins like USDT and USDC serve as substitutes for dollars in the crypto market, and their demand will directly reflect investors' expectations for dollar liquidity changes. Additionally, the on-chain lending rate curve will also change with the macro environment.

• Demand for Stablecoins: In times of dollar scarcity, the offshore market often resorts to stablecoins as a "curve rescue." When it becomes difficult to obtain dollars overseas, USDT often trades at a premium in the over-the-counter market because everyone is scrambling for this digital dollar lifeline. Once the Fed floods the market, the newly added dollars may partially flow into the crypto market, driving large-scale issuance of USDT/USDC to meet trading and hedging demands. In fact, the issuance of stablecoins in recent months indicates that this process has already begun. In other words, whether the dollar strengthens or weakens, the demand for stablecoins will only increase: either due to a lack of dollars seeking alternatives or because of fears of fiat currency depreciation prompting funds to move on-chain for temporary shelter. Especially in emerging markets and regions with strict regulations, stablecoins play the role of dollar substitutes, and every fluctuation in the dollar system only strengthens the presence of stablecoins as "💲crypto dollars." It is conceivable that if the dollar enters a new depreciation cycle, investors may increasingly rely on stablecoins like USDT to circulate within the crypto space, thus pushing the market value of stablecoins to new highs.

• DeFi Yield Curve: The tightness of dollar liquidity will also transmit through interest rates to the DeFi lending market. During dollar shortages, on-chain dollars become precious, leading to soaring borrowing rates for stablecoins, and the DeFi yield curve steepens (lenders demand higher returns). Conversely, when the Fed's easing results in abundant dollars in the market and traditional interest rates decline, stablecoin rates in DeFi become relatively attractive, attracting more funds to flow on-chain for returns. An analysis report indicates that under expectations of the Fed entering 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 to on-chain to seek higher returns, further accelerating this trend. Bernstein analysts even predict that as demand for crypto credit grows, stablecoin annualized yields in DeFi are expected to rebound to over 5%, surpassing the returns of U.S. money market funds. This means DeFi has the potential to offer relatively better returns in a low-interest macro environment, thereby attracting traditional capital attention. However, it is important to note that if the Fed's easing ultimately triggers rising inflation expectations, stablecoin borrowing rates may also rise again to reflect risk premiums. Therefore, the DeFi yield curve may undergo a "first down, then up" fluctuation in repricing: first flattening due to abundant liquidity, then steepening under inflationary pressures. But overall, as long as dollar liquidity floods the market, the trend of massive capital flowing into DeFi in search of returns will be irreversible, which will push up the prices of quality assets and lower risk-free interest rates, shifting the entire yield curve in favor of borrowers.

In conclusion, the macro chain reaction triggered by Trump's tariff policy will profoundly impact various aspects of the crypto market. From macroeconomics to dollar liquidity, and then to Bitcoin prices and the DeFi ecosystem, we are witnessing a butterfly effect: the trade war ignites a currency storm, and amidst the dramatic fluctuations of the dollar, Bitcoin is poised for a rise, while stablecoins and DeFi face both opportunities and challenges. For astute crypto investors, this macro storm is both a risk and an opportunity—as the popular saying in the crypto circle goes: "The day central banks print money is the day Bitcoin ascends." Objectively, the aggressive tariff model has effectively propelled this process. Perhaps QE is getting closer. Although I don't usually like to narrate in terms of "a grand chess game," it seems that this is already the most positive and clear perspective.