Bitcoin’s price has declined since the White House announced new reciprocal tariffs, but we expect that tariffs and trade tensions will ultimately be positive for Bitcoin adoption over the medium term.
First, higher tariffs contribute to stagflation, which tends to be negative for traditional asset returns and positive for scarce commodities like gold. Bitcoin was not around for past stagflations but can be considered a scarce digital commodity and is increasingly viewed as a modern store of value. Second, trade tensions may put pressure on reserve demand for the U.S. Dollar, opening space for competing assets, including other fiat currencies, gold, and Bitcoin.
Although near-term policy uncertainty is very high, in our view long-term oriented investors should position portfolios for sustained Dollar weakness and generally above-target inflation — consistent with how periods of severe U.S. trade frictions have been resolved in the past.
Bitcoin would likely benefit from this macro backdrop, in our view, and this may be why it has outperformed equity markets (on a risk-adjusted basis) through the recent drawdown. Moreover, like gold in the 1970s, Bitcoin today has a rapidly improving market structure, supported by U.S. government policy changes, that may help broaden the Bitcoin investor base.
Exhibit 1: Bitcoin had moderate drawdown in risk-adjusted terms
Over the short term, the global market outlook will likely depend on trade talks between the White House and other countries. Although negotiations could result in lower tariffs, setbacks in the talks could also result in more retaliation. Both realized and implied volatility in traditional markets remain very high, and it is difficult to predict how the trade conflict will evolve in the coming weeks (Exhibit 2). Investors should be mindful about appropriate position sizing in a high-risk market environment. That being said, Bitcoin’s price volatility has increased by much less than equity volatility, and a range of indicators suggest that speculative trader positioning in crypto is relatively low. If macro risks ease over the coming weeks, crypto valuations should be poised to rebound, in our view.
Beyond the very short-term, the impact of higher tariffs on Bitcoin will depend on their consequences for the economy and for international capital flows. In our view, despite the decline in the price of Bitcoin over the last week, the sharp increase in tariffs and the likely changes to global trade patterns should be considered positive for Bitcoin adoption over the medium term. This is because tariffs (and related changes to non-tariff trade barriers) can contribute to “stagflation,” and because they may result in structurally weaker demand for the U.S. Dollar.
Asset Allocation for Stagflation
Stagflation refers to an economy with low and/or slowing GDP growth and high and/or accelerating inflation. Tariffs raise the price of imported goods and therefore (at least temporarily) contribute to inflation. At the same time, tariffs can slow economic growth due to lower real household incomes as well as the adjustment costs faced by firms. In the longer run this may be offset by higher investment in domestic manufacturing, but most economists expect that the new tariffs will weigh on the economy for at least the next year.[3] Bitcoin is too young for us to know how it would have behaved in past episodes, but historical data shows that stagflation tends to be negative for traditional asset returns and favorable for scarce commodities like gold.
Exhibit 3: Traditional assets had negative real returns in the 1970s
Episodes of stagflation are not usually so extreme, but the impact on asset returns is broadly consistent over time. Exhibit 4 shows average annual returns for U.S. stocks, government bonds, and gold from 1900 through 2024, under different regimes for GDP growth and inflation. The idea that returns for different assets vary systematically across the economic cycle is the basis of macro investing.
The historical data highlight three points:
Equity returns improve when GDP growth is high and/or accelerating and when inflation is low and/or slowing. As a result, equity returns should be expected to fall during stagflation, and investors should potentially reduce equity allocations.
Bond returns improve when GDP growth is low or falling. Inflation has a less clear impact on bond returns, partly because high inflation also often implies high average yields (and higher cash interest rates). For bond allocations, investors should consider whether tariffs primarily imply weaker economic growth or higher inflation.
Gold returns improve with stagflation — i.e., when GDP growth is low or slowing and when inflation is high or accelerating. Therefore, if the macroeconomic outlook suggests a higher risk of stagflation, investors should potentially consider increasing allocations to assets like gold.
Exhibit 4: Stagflation lowers equity returns and raises gold returns
Bitcoin and the U.S. Dollar
Tariffs and trade tensions may also support Bitcoin adoption over the medium term due to pressure on demand for the U.S. Dollar. In part this is mechanical: if gross trade flows with the U.S. decline, and most of those flows are denominated in U.S. Dollars, there will be less transactional demand for the currency. However, if hiking tariffs also creates conflict with other major countries, they could also weaken demand for the Dollar as a store of value.
Exhibit 5: Dollar share of reserves greatly exceeds U.S. share of world economy
The moment in U.S. history most comparable to President Trump’s “Liberation Day” announcement is arguably “Nixon Shock” on August 15, 1971. That evening, President Nixon announced 10% across-the-board tariffs and an end to the convertibility of Dollars into gold — a system that had underpinned the global trade and finance since the end of WWII. The action triggered a period of diplomacy between the U.S. and other nations, culminating in the Smithsonian Agreement in December 1971, in which other countries agreed to revalue their currencies higher versus the U.S. Dollar. The greenback eventually depreciated 27% between Q2 1971 and Q3 1978. In the last 50 years there have been several periods of trade tensions followed by (partially negotiated) Dollar weakness (Exhibit 6).
Exhibit 6: Will there be a “Mar-a-Lago Accord” to weaken the Dollar?
Bitcoin for Our Time
Financial markets are adjusting to an abrupt change in U.S. trade policy that will have a negative short-run impact on the economy. However, market conditions over the last week are unlikely to be the norm over the next four years. The Trump administration is pursuing a range of policy actions will have different implications for GDP growth, inflation, and the trade deficit (Exhibit 7). For example, although tariffs may reduce growth and raise inflation (i.e., contribute to stagflation), certain types of deregulation could raise growth and reduce inflation (i.e., reduce stagflation). The net outcome will depend on the degree to which the White House implements its policy agenda in each of these areas.
Exhibit 7: U.S. macro policy will have range of effects on growth and inflation
While the outlook is uncertain, our best guess is that U.S. government policy will result in sustained Dollar weakness and generally above-target inflation over the next 1-3 years. Tariffs alone will tend to slow growth, but the impact may partly be offset by tax cuts, deregulation, and Dollar depreciation. If the White House also aggressively pursues other, more pro-growth policies, GDP growth could hold up reasonably well despite the initial shock from tariffs. Whether or not real growth remains strong, history suggests that a period of stubborn inflation pressures could be challenging for equity markets and favorable for scarce commodities like gold and Bitcoin.
Moreover, like gold in the 1970s, Bitcoin today has a rapidly improving market structure — underpinned by U.S. government policy changes — that may help broaden the Bitcoin investor base. Since the start of the year, the White House has made a wide range of policy changes that should support investment in the digital assets industry, including withdrawing a range of lawsuits, ensuring assets to traditional commercial banking, and allowing regulated institutions like custodians to offer crypto services. This has in turn triggered a wave of M&A activity and other strategic investments. The new tariffs have been a short-term headwind for digital asset valuations, but the Trump administration’s crypto-specific policies have been supportive of the industry. Taken together, rising macro demand for scarce commodity assets and an improving operating environment for investors could be a potent combination for Bitcoin adoption over the coming years.
