Tariff Policy and Monetary Easing: Opportunities and Challenges in the Crypto Market

Recently, a new tariff policy has caused shocks in the global economy. This initiative aims to change the long-standing trade imbalance, but it may also have unexpected effects on the U.S. Treasury market. The core issue is that the tariff policy could lead to a decrease in foreign demand for U.S. Treasuries, which in turn may force more monetary easing measures to maintain the stable operation of the Treasury market.

The impact of this policy is mainly reflected in the following aspects:

1. Trade Structure: High tariff policies aim to reduce imports and encourage domestic production, thereby narrowing the trade deficit. However, this approach may have side effects, such as increasing inflationary pressures and provoking retaliatory tariffs from other countries.

2. International capital flows: A decrease in U.S. imports means a reduction in the dollars flowing overseas, which may trigger a "dollar shortage" globally. This could lead to liquidity tightening in emerging markets and change the patterns of global capital flows.

3. U.S. Treasury Supply and Demand: For a long time, America's massive trade deficit has led to substantial dollar holdings overseas, which typically flow back to the U.S. through the purchase of U.S. Treasuries. Tariff policies may reduce the ability of foreign investors to purchase U.S. Treasuries, while the U.S. fiscal deficit remains high, leading to an increase in the supply of government bonds. This could result in rising U.S. Treasury yields, higher financing costs, and even the risk of insufficient liquidity.

In the face of this situation, the Federal Reserve may have to take action to alleviate the tight liquidity of the dollar through monetary easing policies. In fact, the Fed chairman recently hinted that quantitative easing (QE) may soon be restarted, with a focus on purchasing U.S. Treasury bonds. This indicates that officials also recognize the need for additional dollar liquidity injections to maintain the operation of the Treasury bond market.

However, this approach also faces a dilemma: injecting US dollar liquidity in a timely manner can stabilize government bond yields and mitigate the risk of market failure, but large-scale monetary expansion may also give rise to inflation, undermining the purchasing power of the dollar. The Federal Reserve needs to find a balance between stabilizing the bond market and controlling inflation, but at present, ensuring the stability of the government bond market is a top priority.

For Bitcoin and encryption assets, the signal of the Federal Reserve restarting the printing press is almost positive news. When the dollar is flooding and expectations of credit currency devaluation rise, rational capital will seek anti-inflation assets, and Bitcoin's appeal as "digital gold" significantly increases. The value of Bitcoin, with its limited supply, is highlighted in this macro context, and its supporting logic becomes clearer: as fiat currency continues to "lighten", hard currency assets will "weigh heavier".

The price of Bitcoin largely depends on the market's expectations of future fiat currency supply. When investors anticipate a significant expansion in the supply of dollars and a decline in the purchasing power of paper money, safe-haven funds may flock to assets like Bitcoin, which cannot be over-issued. Looking back to 2020, the simultaneous rise in the prices of Bitcoin and gold after the Federal Reserve's large-scale QE is clear evidence.

In addition to the expectation of price increases, this round of macro changes will also strengthen the narrative of Bitcoin as "digital gold." If the Federal Reserve's monetary easing triggers a lack of trust in the fiat currency system, the public may be more inclined to view Bitcoin as a store of value that is resistant to inflation and policy risks, similar to how people embraced physical gold during past turbulent times.

The significant fluctuations of the US dollar not only affect Bitcoin but also have far-reaching impacts on stablecoins and the DeFi sector. Dollar-pegged stablecoins such as USDT and USDC, serving as substitutes for the dollar in the crypto market, will see their demand directly reflecting investors' expectations regarding dollar liquidity changes. Furthermore, on-chain lending interest rate curves will also vary with the macro environment.

In terms of stablecoin demand, whether the US dollar strengthens or weakens, the rigid demand for stablecoins only increases. Especially in emerging markets and regions with strict regulations, stablecoins play the role of an alternative to the US dollar, and every fluctuation in the dollar system actually reinforces the presence of stablecoins.

For DeFi yield curves, the tightness or looseness of US dollar liquidity will be transmitted to the DeFi lending market through interest rates. During periods of US dollar scarcity, on-chain US dollars become precious, and the borrowing rates for Stablecoins may soar. Conversely, when the Federal Reserve injects liquidity, leading to an abundance of US dollars in the market and a decline in traditional interest rates, the interest rates for Stablecoins in DeFi become relatively attractive, potentially drawing more funds into on-chain for returns.

Overall, the current macroeconomic changes will profoundly impact various aspects of the crypto market. From macroeconomics to dollar liquidity, to Bitcoin trends and the DeFi ecosystem, we are witnessing a butterfly effect: trade policies triggering a monetary storm, and amidst the sharp fluctuations of the dollar, Bitcoin is poised for a breakout, while stablecoins and DeFi are facing both opportunities and challenges in this changing landscape. For astute crypto investors, this macro storm presents both risks and opportunities.