Key Takeaways

• The year 2025 has seen a dramatic resurgence of U.S.-led trade protectionism. Since President Donald Trump took office in January 2025, the United States has ignited fear of a global trade war by levying sweeping new tariffs — both country-specific and sector-specific. Over the past week alone, a fresh round of “reciprocal” tariffs was unveiled, with other nations announcing countermeasures in response.

• In this report, we examine how these tariffs – the most aggressive since the 1930s – are reverberating through the macroeconomy and crypto markets. We provide data-driven analysis on tariff levels, macroeconomic trends (inflation, growth, interest rates, Fed outlook), and the resulting impact on crypto asset performance, volatility, and correlations. Finally, we discuss key areas to watch and the outlook for crypto in a stagflationary, protectionist environment.
  
  

The 2025 Tariff Resurgence

After years of relative trade peace, 2025 has brought a swift reversal. In his first days back in office, President Trump began fulfilling campaign promises by imposing wide-ranging import tariffs — both country-specific and sector-specific — under emergency authority​. 

Trade tensions escalated further on April 2, when the U.S. announced sweeping reciprocal tariffs — marking “Liberation Day” as the latest inflection point in the global trade war. What many countries once viewed as normalized trade relations with the U.S. has now shifted. Key developments from the past week include:

• Baseline Tariffs: A new 10% blanket tariff on all imports to the U.S. was announced, reversing decades of trade liberalization​. This baseline levy took effect on April 5.

• Targeted Duties: Higher country-specific rates were layered on top. President Trump described these as “reciprocal” tariffs aimed at countries with high barriers against U.S. products​. Notably, China will face an additional 34% tariff — raising its effective rate to 54% when combined with the existing 20%. Other targeted rates include 20% on European Union goods, 24% on Japan, 46% on Vietnam, and 25% on auto imports. Canada and Mexico were notable omissions, having already been hit with 20% tariffs back in February.

• Global Retaliation: U.S. trading partners have swiftly responded in kind. By mid-February, several countries targeted by early tariffs had already announced retaliatory measures. Canada, after failing to secure delays on U.S. duties, imposed a 25% tariff on all U.S. imports. China, which had also responded early, escalated further on April 4 by announcing a sweeping 34% tariff on all U.S. imports.

With reciprocal tariffs now taking effect and trade tensions rising, more countries are expected to follow with their own countermeasures. The European Union has already signaled that a response is imminent, while several other major economies have outlined plans to retaliate against the latest U.S. tariffs. While the full extent of global responses remains uncertain, all signs point to a broad-based trade war emerging across multiple fronts.

Figure 1: The April 2 “Liberation Day” tariffs targeted up to 60 countries, including several of the U.S.’s largest trading partners

Together, these developments have raised U.S. import taxes to levels not seen since the Smoot-Hawley Tariff Act of 1930, which imposed sweeping tariffs on thousands of goods during the Great Depression. According to available data, the average U.S. tariff rate has climbed to around 18.8%, with some estimates placing it as high as 22% — a sharp rise from just 2.5% in 2024.

For context, tariffs averaged 1–2% for much of recent history​, and even during the 2018–2019 trade skirmishes, they only peaked near 3%. The 2025 measures therefore represent an unprecedented tariff shock in modern times – akin to a return to 1930s-era protectionism.

Figure 2: The resurgence of U.S. tariffs has driven import taxes to their highest levels in nearly a century 

Market Impact: Cooling Demand, Risk-Off Sentiment and Volatility Spike

1. Cooling Demand and Risk-Off Sentiment

Market sentiment has turned decidedly cautious, with investors reacting to the tariff announcements in classic 'risk-off' behaviour. Total crypto market capitalization has dropped an estimated 25.9% from January highs — wiping out ~US$1T in value — underscoring its sensitivity to macroeconomic instability.

Crypto assets have moved largely in lockstep with equities, with both experiencing cooling demand, broad selloffs, and a slide into correction territory. In contrast, traditional safe havens like bonds and gold have rallied, with gold breaking successive all-time highs as investors seek shelter from growing macroeconomic uncertainty.

Figure 3: Since initial tariff announcements, crypto is down 25.9%, the S&P 500 17.1%, while gold is up 10.3%, breaking successive all-time highs

The sharp market reaction also highlights how crypto behaves during acute risk-off episodes: Bitcoin (BTC) has dropped 19.1%, with most major altcoins matching or exceeding that decline. Ethereum (ETH) dropped over 40%, while high-beta categories like Memecoins and Artificial Intelligence (AI) have plunged more than 50%. The broad selloff has erased early-year gains across much of the crypto market, pushing even BTC into negative territory year-to-date (YTD) as of early April — despite its strong performance in 2024.

Figure 4: Altcoins have taken significantly heavier hits than Bitcoin, as macro fears sparked by tariffs weigh on crypto market sentiment

As crypto markets increasingly behave like risk assets, a prolonged trade war could continue to weigh on capital flows and dampen demand for digital assets in the near term. As a result, capital that might have entered crypto is either staying on the sidelines or shifting into perceived safe havens like gold. This sentiment was reflected in a recent fund manager survey, where only 3% of respondents said they would allocate to Bitcoin in the current environment — a sharp contrast to gold, which was favored by 58%.

Figure 5: Just 3% of FMS investors view Bitcoin as their preferred asset class in the event of a trade war

2. Volatility Spike

The market’s sensitivity to tariff policy has been clearly on display, with each major announcement triggering sharp volatility spikes. BTC has experienced several violent price swings in recent months — including one of its largest single-day drops since the 2020 COVID crash. When Trump surprised markets in late February with plans to impose tariffs on Canada and the EU, BTC briefly dropped around 15% over the following days, coinciding with an uptick in realized volatility. ETH followed a similar path, with its 1-month volatility rising above 100%, up from prior ranges near 50%.

These movements underscore the market’s heightened vulnerability to sudden policy shifts. In this high-uncertainty macro environment, elevated volatility is likely to persist — both as part of a broader risk-off dynamic and as the potential for further trade war escalations lingers. For markets to stabilize, a key condition will be clarity — or confidence that the bulk of tariff-related announcements and policy shifts are behind us. We’ve seen this pattern play out before: once markets fully absorb and price in new tariff developments, volatility tends to subside.

Figure 6: In this period, BTC’s 1-month realized volatility rose above 70%, while ETH surged past 100%, reflecting intensified market swings in the month following tariffs

Macroeconomic Impact: Inflation, Stagflation Fears, Interest Rates, and Fed Outlook

1. Inflation and Stagflation Fears

The new tariffs amount to a substantial tax hike on imported goods, adding fresh inflationary pressure just as the Federal Reserve (Fed) has been trying to quell price growth. Concerns that these measures could undermine disinflation efforts are already showing up in markets. While market-based measures like 1-year inflation swaps have surged past 3%, consumer surveys now show expectations pushing as high as 5% — both pointing to a belief that prices will run hotter over the next 12 months.

At the same time, economists warn that a full-blown tariff war (with global retaliation) could cost the world economy up to US$1.4T in lost output, with U.S. real GDP per capita projected to fall nearly 1% in the early stages. Fitch Ratings cautions that if the full tariff regime remains in place, many economies could enter recession — noting that U.S. tariff levels are now so high, “most forecasts can be thrown out the door”.

With inflation expectations rising and growth concerns mounting, the risk of tipping into stagflation — a period of stagnant output alongside persistent price increases — has become more apparent.

Figure 7: The change in macro conditions in 2025 has pushed 1-year expectations toward elevated inflation and reduced growth

2. Interest Rates and Fed Outlook

Fed Funds futures are now pricing in a higher likelihood of rate cuts in the months ahead. This marks a notable turnaround — just weeks ago, the Fed remained firmly focused on curbing inflation, but the growing threat to economic growth has markets beginning to anticipate a potential pivot in monetary policy to support the economy. 

Figure 8: Markets are increasingly pricing in rate cuts for 2025, now expecting four 25bps cuts — a significant shift from earlier expectations of just one

Reflecting this shift in sentiment, Fed officials have voiced concern, emphasizing that the tariffs run counter to their original economic strategy. The central bank now faces a difficult trade-off: either tolerate tariff-driven inflation or maintain a hawkish rate stance at the risk of exacerbating a potential economic slowdown.

“The tariffs announced in recent weeks are larger than expected, and their economic effects — particularly on inflation and growth — will need to be closely monitored.”

– Jerome Powell, April 4, 2025

In the near term, the Fed appears committed to keeping long-term inflation expectations well-anchored. Still, policy decisions are expected to remain data-dependent — guided by whichever signal, inflation or growth, shows greater weakness. Should inflation rise too far above target, the risk is that a stagflationary environment may limit the Fed’s ability to respond. This uncertain policy outlook is further contributing to market volatility.

Outlook

1. Correlation and Diversification

The evolving relationship between crypto and traditional market assets is coming to focus — and Bitcoin, as the market’s dominant asset, offers the clearest lens into this shift. The recent trade war–driven risk-off episode has impacted BTC’s correlation profile with both equities and traditional hedges.

While tariffs were first mentioned on January 23, the initial market response was fragmented — BTC and equities moved somewhat independently, pushing their 30-day correlation to a local low of –0.32 by February 20.  However, as the trade war rhetoric intensified and risk-off sentiment deepened into March, that figure climbed to 0.47, reinforcing BTC’s short-term alignment with broader risk sentiment. In contrast, BTC’s correlation with traditional hedges like gold weakened sharply. What was previously a neutral-to-positive relationship turned sharply negative, with the 30-day BTC–gold correlation dropping to –0.22 in early April.

These shifts suggest that macroeconomic factors — particularly trade policy and rate expectations — are increasingly driving crypto market behavior, temporarily eclipsing underlying demand dynamics. Whether this correlation structure persists will be key to understanding Bitcoin’s longer-term positioning and diversification value.

Figure 9: An initial fragmented response gave way to tighter BTC-S&P 500 alignment as the tariff war deepened, contrasting with a steadily declining gold correlation

2. Rediscovering the Safe Haven Narrative

While crypto’s response to recent macro and liquidity shocks underscores its current positioning as a risk asset, the broader trend remains intact: Bitcoin’s correlation with traditional markets tends to rise during acute stress but fades as conditions normalize. Since 2020, BTC’s 90-day correlation with equities (~0.32) and gold (~0.12) has fluctuated but never sustained deep alignment — reinforcing its distinction from conventional asset classes.

Even in the wake of recent tariff announcements, BTC has shown some signs of resilience, holding steady or rebounding on days when traditional risk assets faltered. Separately, long-term holder supply has continued its upward trajectory — reflecting conviction and limited capitulation during recent volatility. This behavior suggests that, despite short-term swings, BTC may still have room to reassert a more independent macro identity.

Figure 10: Bitcoin’s long-term correlation with traditional assets has remained modest, averaging just 0.32 with S&P 500 and 0.12 with gold since 2020

The key question is whether BTC can return to its long-term pattern of low correlation with equities. We’ve seen glimpses of this potential before — most notably during the banking turmoil of March 2023, when BTC decoupled from equities and rallied amid broader financial sector uncertainty. Now, with reciprocal tariffs emerging and global markets adjusting to the prospect of prolonged trade fragmentation, much could hinge on BTC’s ability to reassert its safe haven narrative. Market participants will be watching closely to see if BTC is able to retain its appeal as a non-sovereign, permissionless asset in a protectionist global economy.

One pathway lies in its historical appeal during periods of monetary inflation and fiat debasement, particularly when the Fed eases aggressively. Should the Fed pivot to rate cuts — a potential catalyst in itself — and inflation remains elevated, BTC could attract renewed interest as a form of “hard,” inflation-resistant money, or at least be positioned as such through similar market narratives. Monitoring the dollar also remains important in this context, as tariffs can contribute to short-term strength, and BTC has historically exhibited an inverse relationship.

How this all plays out will be pivotal in shaping BTC’s longer-term role as an asset class — and its effectiveness as a portfolio diversifier. This also holds implications for other major altcoins, which have exhibited more risk-off behavior in this climate and will likely continue doing so until broader sentiment shifts — most often by following BTC’s lead.

3. Crypto Markets in a Stagflationary, Protectionist World 

Looking ahead, crypto markets face a complex macroeconomic landscape dominated by trade policy risks, stagflationary pressures, and fractured global coordination. If global growth continues to weaken and no clear narrative takes hold for crypto, investor sentiment may erode further. A protracted trade war would test the industry's resilience — potentially drying up retail flows, slowing institutional allocation, and curbing VC funding. Key macro catalysts to watch in the coming months include:

• Further Trade Developments: Any new trade policy moves — such as broader tariff lists, surprise relief, or major bilateral shifts (e.g., U.S.–China negotiations or escalation) — are likely to directly impact market sentiment and inflation expectations. With policy announcements often arriving unexpectedly, markets may remain volatile and highly reactive, keeping risk assets like crypto tethered to broader macro swings.

• Core Inflation Data: Upcoming CPI and PCE prints will be closely watched. Strong upside surprises, especially those tied to rising import costs, may reinforce stagflation concerns. Conversely, softer inflation readings may reassure markets and ease pressure on central banks, supporting a more dovish policy outlook and lifting risk assets, including crypto.

• Global Growth Indicators: Signs of economic slowdown — such as weakening consumer confidence, falling business activity (PMIs), a softening labor market (rising jobless claims or slowing payroll growth), corporate earnings downgrades, or yield curve inversions (a common recession signal) — could fuel risk-off sentiment in the short term. However, deeper macro weakness may also accelerate expectations for policy easing, which could ultimately benefit crypto. In past cycles, BTC has sometimes rallied on liquidity injections or fiscal deficits, especially when paired with elevated inflation expectations.

• Central Bank Policy: How the Fed and other major central banks respond — particularly in balancing inflation against recession risk — will shape liquidity across all asset classes, including crypto. A refusal to cut rates despite slowing growth may keep risk assets under pressure, while a pivot could provide broad relief. If real rates begin falling — whether by design or inflation persistence — crypto could benefit as a long-duration risk asset. Any divergent central bank policies (e.g., a dovish Fed vs. hawkish ECB) could also drive cross-border capital flows, contributing to increased crypto market volatility. 

• Crypto-Specific Policy: Developments such as ETF approvals, strategic BTC reserves, the passing of key crypto legislation, and other regulatory shifts could serve as independent catalysts within this macro backdrop. A clear, distinct crypto-native driver may help the market break from its current macro-driven risk profile and reassert its idiosyncratic strength. That said, the effect can cut both ways — overhangs like unresolved litigation, stalled policy efforts, or even tighter regulatory oversight triggered by trade tensions could all weigh on sentiment. Whether the next catalyst is positive or negative may shape how independently crypto trades in the near term.

Closing Thoughts

The most aggressive tariffs since the 1930s are rippling through both the macroeconomy and crypto markets. In the near term, crypto may remain volatile, with sentiment swinging in response to ongoing trade war developments.

If inflation runs hot while growth falters, the Fed’s response will be pivotal: a pivot to easing could fuel a crypto rally through renewed liquidity, while a hawkish stance may keep pressure on risk assets. Progress or setbacks in tariff negotiations will likewise sway investor sentiment in either direction.

Should macro conditions stabilize, new narratives take hold, or crypto reassert its role as a long-term hedge — renewed growth could follow. Until then, markets are likely to remain range-bound and reactive to macro headlines. Investors should stay closely attuned to global developments, remain diversified, and be ready to capitalize on any market dislocations this trade war may create.