Impact Analysis: Tariff Escalation and the Cryptocurrency Market

Author: Moulik Nagesh, Binance Research

Key Points

In 2025, U.S.-led trade protectionism made a strong comeback. Since Donald Trump resumed the presidency in January 2025, the U.S. has implemented a series of large-scale new tariffs—targeting both specific countries and specific industries—raising concerns about a global trade war. Just in the past week, the U.S. launched a new round of "reciprocal" tariffs, prompting other countries to announce countermeasures.

This report will analyze how these tariffs (the most aggressive tariff measures since the 1930s) impact the macroeconomy and the crypto market. We will examine tariff levels, macroeconomic trends (including inflation, growth, interest rates, and Federal Reserve outlook), and their effects on the performance, volatility, and correlation of crypto assets based on data. Finally, we will explore key future observations and the market outlook for crypto assets in an environment of stagflation and protectionism.

The Return of Tariffs in 2025

After several years of relative trade peace, 2025 saw a rapid reversal. In the first few days of President Trump's return to the White House, he began fulfilling his campaign promises by imposing tariffs on a wide range of imported goods—covering specific countries and industries.

Trade tensions escalated further on April 2. On that day, the U.S. announced comprehensive "reciprocal" tariffs and designated the day as "Liberation Day," marking a new turning point in this round of global trade war. Many countries that previously viewed their trade relations with the U.S. as normalized have now undergone a fundamental shift. Key events from the past week include:

• Base Tariff: The U.S. announced a new 10% uniform tariff on all imported goods, reversing decades of trade liberalization. This base rate took effect on April 5.
• Targeted Tariffs: In addition to the base rate, higher country-specific tariffs were imposed. President Trump referred to these as "reciprocal" tariffs, aimed at countries that set high barriers to U.S. products. Notably, Chinese goods will incur an additional 34% tariff—resulting in a total tariff rate of 54% when combined with the existing 20%. Other countries' targeted tariffs include: 20% on EU goods, 24% on Japan, 46% on Vietnam, and 25% on car imports. Canada and Mexico were not included in the new list as they had already been subjected to a 20% tariff in February.
• Global Retaliation: U.S. trade partners quickly responded. By mid-February, several countries that had been taxed early announced countermeasures. Canada, unable to successfully negotiate a delay on U.S. tariffs, decided to impose a 25% tariff on all U.S. imports. China also responded early and further escalated on April 4, announcing a 34% tariff on all U.S. imports.

With the implementation of "reciprocal" tariffs and escalating trade tensions, it is expected that more countries will introduce their own countermeasures. The EU has clearly stated that it will respond soon, and several other major economies have also developed relevant counterattack plans. Although the full extent of the global response remains unclear, all signs currently indicate that a broad trade war involving multiple fronts is forming.

Chart 1: On April 2, 2025, "Liberation Day," tariffs covered up to 60 countries, including several of the U.S.'s major trading partners Note: This table reflects the "reciprocal" tariffs imposed by the U.S. on its top ten sources of imports as of April 2.

Source: BBC, X (@WhiteHouse), Binance Research, as of April 3, 2025

These policies have caused U.S. import tax rates to soar to their highest level since the implementation of the Smoot-Hawley Tariff Act in 1930, which imposed comprehensive tariffs on thousands of goods during the Great Depression. According to existing data, the average tariff rate in the U.S. has risen to about 18.8%, with some estimates even reaching 22%—a dramatic leap compared to 2.5% in 2024.

For reference, the average tariff rate in the U.S. has typically remained between 1-2% over the past few decades; even during the U.S.-China trade frictions from 2018 to 2019, it only rose to around 3%. Therefore, the measures in 2025 represent an unprecedented tariff shock in modern history—almost equivalent to a return to the protectionism of the 1930s.

Chart 2: The rebound in U.S. tariffs has raised import tax rates to their highest level in nearly a century

Source: Tax Foundation, Binance Research, as of April 3, 2025

Market Impact: Cooling Demand, Risk Aversion, and Surging Volatility

1. Cooling Demand and Rising Risk Aversion

Market sentiment has clearly shifted to caution, with investors exhibiting typical "risk-averse" behavior in response to the tariff announcements. The total market capitalization of the crypto market has fallen by about 25.9% from its peak in January, evaporating nearly $1 trillion in value, highlighting its high sensitivity to macroeconomic instability.

Crypto assets have shown a high correlation with the stock market, both facing cooling demand, widespread sell-offs, and entering correction territory. In contrast, traditional safe-haven assets like bonds and gold have performed well, with gold continuously hitting historical highs, becoming a refuge for investors amid rising macro uncertainty.

Chart 3: Since the initial tariff announcement, the crypto market has fallen 25.9%, the S&P 500 has dropped 17.1%, while gold has risen 10.3%, continuously hitting historical highs

Source: Investing.com, CoinGecko, Binance Research, as of April 4, 2025

The intense market reaction also highlights the characteristics of crypto assets during periods of severe "risk aversion": Bitcoin (BTC) fell by 19.1%, with most mainstream altcoins experiencing similar or even greater declines. Ethereum (ETH) dropped over 40%, while high-beta sectors (such as meme coins and AI-related tokens) plummeted more than 50%. This round of sell-offs erased most of the gains in the crypto market since the beginning of the year, and by early April, even BTC's year-to-date (YTD) returns had turned negative—despite its strong performance in 2024.

Chart 4: During the macro panic triggered by tariffs, altcoins fell significantly more than Bitcoin, exacerbating market pessimism

Source: CoinGecko, Binance Research, as of April 4, 2025

As the crypto market increasingly exhibits characteristics of a risk asset, if the trade war continues, it may further suppress capital inflows and dampen demand for digital assets in the short term. Funds may remain on the sidelines or shift to gold and other assets perceived as safer. This sentiment is also reflected in a recent fund manager survey, where only 3% of respondents indicated they would allocate to Bitcoin in the current environment, while 58% preferred gold.

Chart 5: Only 3% of global fund managers view Bitcoin as the preferred asset class in the context of a trade war

Source: BofA Global Fund Manager Survey, Binance Research, as of February 2025

2. Surging Volatility

The market's sensitivity to tariff policies is evident, with each significant announcement triggering sharp price fluctuations. Over the past few months, BTC has experienced multiple large price swings—one of the largest single-day declines since the COVID-19 crash in 2020. At the end of February 2025, when Trump suddenly announced plans to impose tariffs on Canada and the EU, BTC fell about 15% in the following days, while its actual volatility surged significantly. ETH exhibited a similar trend, with its one-month volatility skyrocketing from around 50% to over 100%.

These market behaviors highlight the crypto market's extreme sensitivity to sudden policy changes in the current high-uncertainty macro environment. In the near term, if policy directions remain unclear or the trade war escalates further, the market will likely maintain high volatility. Historical experience also indicates that volatility may gradually subside only after the market fully digests and prices in the new tariff policies.

Chart 6: During this phase, BTC's one-month actual volatility rose to over 70%, while ETH exceeded 100%, reflecting the market's severe fluctuations following the tariff announcement

Source: Glassnode, Binance Research, as of April 4, 2025

Macroeconomic Impact: Inflation, Stagflation Concerns, Interest Rates, and Federal Reserve Outlook

1. Inflation and Stagflation Concerns

The new tariffs effectively impose a large amount of additional taxes on imported goods, exacerbating inflationary pressures at a time when the Federal Reserve is trying to suppress price growth. Concerns have emerged in the market that these measures may disrupt the process of declining inflation. Market indicators such as one-year inflation swaps have surged above 3%, while expectations in consumer surveys have risen to around 5%, indicating a general expectation that prices will continue to rise over the next 12 months.

Meanwhile, economists warn that if the trade war escalates fully and triggers a global retaliatory response, the loss of global economic output could reach $1.4 trillion. U.S. per capita real GDP is expected to decline by nearly 1% initially. Fitch Ratings noted that if a comprehensive tariff regime persists, most economies may enter recession, stating that "the current high level of tariffs in the U.S. has rendered most economic forecasting models ineffective."

With rising inflation expectations and concerns about growth, the risk of the global economy slipping into stagflation (a combination of economic stagnation and rising prices) is increasingly prominent.

Chart 7: Changes in macro conditions in 2025 drive one-year expected inflation upward while growth expectations decline

Source: University of Michigan, Binance Research, as of April 5, 2025

2. Interest Rate Outlook and Federal Reserve Position

Federal funds futures data indicate that market expectations for interest rate cuts in the coming months have risen significantly. This marks a clear shift in attitude—just a few weeks ago, the Federal Reserve was firmly committed to suppressing inflation, but now, due to rising concerns about economic growth prospects, the market has begun to anticipate a shift toward easing monetary policy to support the economy.

Chart 8: Market expectations for interest rate cuts in 2025 continue to rise, with expectations for four 25 basis point cuts—far higher than the previous expectation of just one cut

Source: CME Group, Binance Research, as of April 4, 2025

Reflecting this shift in sentiment are the public statements from Federal Reserve officials. They have expressed concerns, emphasizing that the new round of tariffs runs counter to previous economic policy guidelines. The Federal Reserve now faces a difficult choice: to tolerate the additional inflation brought on by tariffs or to maintain a hawkish stance, risking further suppression of growth?

"The scale of tariffs announced in recent weeks has exceeded expectations, and their impact on inflation and growth—especially the cumulative effect—needs to be closely monitored."
------ Jerome Powell, April 4, 2025

In the short term, the Federal Reserve seems committed to maintaining stable long-term inflation expectations. However, monetary policy decisions will continue to depend on data, based on which signal—inflation or growth—appears weaker. If inflation significantly exceeds targets, the stagflation environment may limit the Federal Reserve's ability to respond with policy. This uncertain policy outlook also exacerbates market volatility.

Outlook

1. Correlation and Diversification

The evolving relationship between crypto assets and traditional markets is becoming a focal point—Bitcoin, as the dominant asset in the market, serves as the best window to observe this change. The "risk aversion" event triggered by the trade war has significantly impacted the correlation structure between BTC and the stock market as well as traditional safe-haven assets.

Since tariffs were first mentioned on January 23, the initial market reactions were inconsistent—Bitcoin and stock movements appeared somewhat independent, causing their 30-day correlation to drop to -0.32 on February 20. However, as trade war rhetoric escalated and risk aversion sentiment spread, this figure rose to 0.47 in March, indicating an increased short-term linkage between Bitcoin and overall risk assets.

In contrast, the correlation between Bitcoin and traditional safe-haven assets like gold has significantly weakened—the previously neutral to positive relationship turned into a negative correlation of -0.22 by early April.

These changes indicate that macroeconomic factors, particularly trade policies and interest rate expectations, are increasingly dominating crypto market behavior, temporarily suppressing the market structure that was originally driven by supply and demand logic. Observing whether this correlation structure persists will help understand Bitcoin's long-term positioning and its diversification value.

Chart 9: Initial reactions were divergent; as the trade war escalated, BTC's linkage with the S&P 500 strengthened, while its correlation with gold continued to weaken

Source: Investing.com, Binance Research, as of April 5, 2025

2. Reestablishing the Safe-Haven Asset Narrative

Although recent macro and liquidity shocks have highlighted the "risk attributes" of crypto assets, the long-term trend remains unchanged: Bitcoin's correlation with traditional markets typically rises under extreme pressure but gradually declines as the market stabilizes. Since 2020, the 90-day average correlation between BTC and the stock market has been around 0.32, while with gold it has only been 0.12, indicating that it has maintained a certain degree of separation from traditional asset classes.

Even amid the recent shock from the tariff announcements, BTC has shown some resilience on days when certain traditional risk assets weakened. Meanwhile, the supply from long-term holders continues to rise—indicating that core holders have not significantly reduced their positions during the recent volatility, but rather show strong confidence.

This behavior suggests that despite heightened short-term price volatility, Bitcoin may reestablish a more independent macro identity.

Chart 10: Since 2020, the long-term correlation between Bitcoin and traditional assets has remained moderate: 0.32 with the S&P 500 and 0.12 with gold

Source: Investing.com, Binance Research, as of April 5, 2025

The key question is whether BTC can return to a long-term structure of low correlation with the stock market. A similar trend was observed during the banking turmoil in March 2023, when BTC successfully decoupled and strengthened amid stock market declines.

Now, as the trade war intensifies and global markets begin to adapt to a long-term fragmented trade landscape, whether Bitcoin can once again be viewed as a "non-sovereign, permissionless" safe-haven asset will determine its future macro role. Market participants will closely monitor whether BTC can retain this independent value proposition.

One potential path is to regain its appeal during periods of currency inflation and fiat currency depreciation, especially when the Federal Reserve shifts to easing. If the Federal Reserve begins to cut rates while inflation remains high, Bitcoin may regain favor as a "hard asset" or inflation hedge.

Ultimately, this process will determine BTC's long-term positioning as an asset class—and its diversification utility within investment portfolios. This also applies to other mainstream altcoins, which currently exhibit stronger risk attributes and may continue to rely on BTC-driven market sentiment.

3. The Crypto Market in a Stagflation and Protectionism World

Looking ahead, the crypto market will face a complex macro environment dominated by trade policy risks, stagflation pressures, and a breakdown of global coordination. If global growth continues to weaken and the crypto market fails to form a clear narrative, investor sentiment may further decline.

A prolonged trade war will test the resilience of the entire industry—potentially leading to a depletion of retail capital, a slowdown in institutional allocations, and reduced venture capital funding. Key macro variables to closely monitor in the coming months include:

• Developments in Trade Dynamics: Any new tariff lists, unexpected easing measures, or significant bilateral changes (such as U.S.-China negotiations or further escalations) will directly impact market sentiment and inflation expectations.
• Core Inflation Data: Upcoming CPI and PCE data are crucial. If they unexpectedly rise due to import costs, it will exacerbate stagflation concerns; if the data is weak, it may alleviate pressure on central banks and enhance the appeal of risk assets (including crypto).
• Global Growth Indicators: Declining consumer confidence, slowing business activity (PMI), a weak labor market (rising unemployment claims, slowing non-farm employment), corporate earnings warnings, and an inverted yield curve (a common recession signal) may further trigger risk aversion in the short term. However, if macro weakness accelerates expectations for monetary easing, it could provide support for the crypto market.
• Central Bank Policy Path: How the Federal Reserve and other major central banks seek to balance inflation and recession will determine liquidity for various assets. If they refuse to cut rates against a backdrop of slowing growth, risk assets will remain under pressure; if they shift to easing, it could lead to a broad uplift. If real interest rates decline (whether due to policy or persistent inflation), long-duration assets like Bitcoin may benefit. Divergence in central bank policies (e.g., the Federal Reserve turning dovish while the European Central Bank remains hawkish) may also trigger cross-border capital flows, further exacerbating volatility in the crypto market.
• Crypto-Specific Policy Events: Approvals for ETFs, strategic BTC reserves, and key legislative advancements may serve as independent catalysts in the current macro backdrop, potentially breaking the "macro binding" state of crypto assets and re-emphasizing their uniqueness. However, caution should also be exercised regarding reverse risks, such as regulatory delays or unfavorable litigation developments, which could produce negative feedback.

Conclusion

The most aggressive round of tariff policies since the 1930s is having a profound impact on the macroeconomy and the crypto market. In the short term, the crypto market may continue to exhibit high volatility, with investor sentiment swinging in response to trade war news.

If inflation remains high while growth slows, the Federal Reserve's response will become a key turning point: if it shifts to easing, the crypto market may rebound due to rising liquidity; if it maintains a hawkish stance, pressure on risk assets will persist.

If the macro environment stabilizes and a new narrative emerges, crypto assets may regain their long-term safe-haven status, and the market may look forward to a recovery. Until then, the market is likely to maintain a volatile pattern and remain highly sensitive to macro news. Investors need to closely monitor global dynamics, maintain diversified asset allocations, and seek opportunities amid potential market dislocations caused by the trade war.