Changes in Global Economic Landscape and Outlook for the Crypto Market

The current global situation is unpredictable. Although many people may already be aware of this, it is still worth delving into the current economic landscape.

Although the crypto market has always been the focus of our attention, especially after the confirmation of the bull market rebound following the Bitcoin halving, the market currently seems to have entered a relatively quiet phase. During this phase, most cryptocurrency holders have completed their investments, and choosing to wait and see may be a wise strategy.

For most investors, taking a long-term investment perspective can simplify the decision-making process and reduce the need for frequent adjustments. Currently, the best options seem to be either holding long-term or betting on emerging popular tokens.

Regardless, this calm period in the crypto market has provided us with an opportunity to examine the macroeconomic conditions, which inevitably influence the trends of cryptocurrencies. After all, Bitcoin and other digital assets are fundamentally affected by global economic trends. Although the crypto market currently seems stagnant, the macroeconomic environment is showing noteworthy dynamics.

Today, we will focus on two closely related important economic events:

1. A certain major country is massively selling off U.S. Treasuries and agency bonds.
2. The United States announced a significant increase in tariffs on imported products from the country.

Let's delve into the impact of these events.

For decades, the country has steadily accumulated U.S. Treasury bonds, holding up to 10% of U.S. Treasury bonds through bonds issued by the federal government. The reasons for this include:

• U.S. Treasury bonds are recognized as one of the safest investments in the world, offering stable returns with very low risk. This is attractive for preserving the country's enormous foreign exchange reserves.
• The country exports a large number of goods to the United States, earning a significant amount of dollars. Investing in U.S. Treasury bonds can earn interest instead of holding cash.
• By purchasing U.S. debt, the country helps maintain the relative stability of its own currency. This stability keeps the country's exports competitive, as stable exchange rates make the country's goods more affordable for American consumers.

Recently, the country has been reducing its exposure to US debt. It has been reported that the country sold off US Treasuries and agency bonds at a record pace in the first quarter. The US is naturally unhappy with this development for the following reasons:

• The large-scale sell-off increased the supply of U.S. Treasury bonds in the market, leading to a drop in their prices. As bond prices fall, interest rates rise.
• Rising interest rates mean that the U.S. government needs to pay more in debt service costs. Initially, the sell-off of U.S. Treasury bonds may strengthen the dollar, as investors shift funds into dollars to purchase the bonds being sold. However, over time, the increase in dollar supply may weaken the dollar. Additionally, a 10% gap is significant. Whether other countries can fill this gap remains to be seen.
• Such actions may also affect the value of the dollar relative to the country's currency, making the country's exports more expensive, which could harm the country's economy. However, the country seems to be less concerned about this, as de-dollarization is their top priority.

How can the United States respond? The Federal Reserve may re-enter the debt market and resume quantitative easing (QE), even if interest rates remain above 5%. The U.S. government may also ask banks and other institutions to purchase more government bonds.

However, banks need to be compensated with higher yields, which may incentivize them to increase lending and potentially drive inflation.

Now, let's focus on the second event: the United States announced a substantial increase in tariffs on imported products.

In response, it seems that the President of the United States has announced new and increased tariffs on imports from the country. These tariffs continue the punitive measures implemented by the previous administration, during which the current president criticized these measures for burdening American consumers.

Tariffs on electric vehicles have increased more than fourfold, reaching 100%; tariffs on lithium batteries and their components, as well as some steel and aluminum products, have increased more than threefold. In addition, tariffs on semiconductors and solar panels have doubled.

The new tariffs also target a range of key minerals, magnets, shore-to-ship cranes, and medical products.

This move aims to make goods from the country more expensive in the United States, thereby encouraging consumers to buy more American-made products. This strategy is expected to hit the country's manufacturers and exporters, potentially leading to a decrease in the country's revenue and an increase in unemployment.

However, this strategy faces a significant challenge. The United States currently does not have the capacity to increase domestic production like that of the country. To ramp up domestic activity, fiscal stimulus is needed to help businesses build additional capacity to replace more expensive imported supplies. This essentially means more currency issuance.

To compensate for these tariffs and "localize" the currently lacking industries, the necessary fiscal stimulus may be achieved through more government debt. Given that the U.S. economy is showing signs of slowing down, it cannot rely on GDP growth to cover these costs in the short term.

Impact on the crypto market

So how does all this affect Bitcoin and the crypto market? Besides the possibility that escalating tensions may lead to socio-political instability, a global economic slowdown could reduce disposable income available for investing in encryption, and that is already happening. In fact, these circumstances lead us to believe that in order to support this conflict, there may be more fiscal stimulus and potential currency issuance, while Bitcoin is typically viewed as a hedge against inflation.

In addition, as governments around the world face economic challenges, the previously common view that they would intensify regulation of encryption has weakened, at least in the case of Bitcoin. In fact, it seems quite the opposite, as more and more people begin to appreciate its existence. In the long run, if the dollar depreciates due to increased debt and money supply, Bitcoin may benefit and become an alternative currency option.