Bitcoin (BTC +0.24%) fell by 5.4% on April 3 as the Trump administration's newly announced tariff policies were digested by the market. Now, with economic uncertainty sky-high and investors looking for havens from the turmoil, it's an open question whether the tariffs might deal severe harm to the cryptocurrency sector -- or if crypto might just end up getting dragged down along with everything else.
But is Bitcoin going to fare better than its peers as a result of its highly distributed and decentralized nature? Let's look at its exposure to the emerging set of risks and figure it out.
CRYPTO: BTC
Key Data Points
There isn't a direct risk here
The first thing that investors need to realize -- if they don't already -- is that Bitcoin is not something that's commonly used as a medium for processing international trade payments. There are a few exceptions to that generality, largely related to dodgy attempts at avoiding sanctions or other illegal purposes. But overall, it's not reasonable to expect Bitcoin to become less used if trade is damaged by the possible future implementation of the Trump administration's tariffs on imports. So if there is a detrimental effect on demand for the coin, it won't come from businesses looking to avoid paying tariffs.
Another thing worth mentioning, even though it's obvious, is that the tariffs are not levied on Bitcoin, but rather on goods from countries. Bitcoins are fungible. That means a Bitcoin mined in China is indistinguishable from a Bitcoin mined in the U.S. The transfer of Bitcoin from a wallet holder based in one country to a wallet holder in another country is not something that's being taxed. And it might be impossible to do so, from a technical standpoint, anyway.
However, there is a high chance that Bitcoin mining hardware produced outside the U.S. will become dramatically more expensive to import if the tariffs are implemented as proposed. That means mining companies in the U.S. will suffer. But it does not mean that Bitcoin's price will suffer.
If there is a slowdown in new coin production, Bitcoin prices probably will rise rather than drop. Plus, miners in other countries will still be able to buy the hardware at the same price as they did before any tariffs were levied, and they will. They might even get access to slightly cheaper hardware if demand for that hardware in the U.S. takes a hit due to prices being too high to turn a profit on mining.
The indirect effects could be substantial, so watch out
So Bitcoin is not directly highly exposed to risks stemming from the new tariffs, assuming they are actually levied. Unfortunately for holders, it is highly exposed to indirect risks, like those originating from a sharply contracting global or domestic economy.
Some consider Bitcoin to be digital gold in the sense that it has characteristics of a safe asset, even though those characteristics are more theoretical than empirically proven by its performance during periods of turbulence like now. For most investors, it's an asset that's not as reliable as an investment in a major company's stock, or in an index fund. That's true even if the perception of those investors has shifted a lot toward viewing the coin as a safer asset within its class in recent years.
The point here is that when the market or the economy tumble, people jump to get rid of their risk assets, as they tend to fall the most. Bitcoin will, for many investors, be at the top of the list of assets to dump when times look like they will be getting tough. If there is actually an economic recession caused by the Trump administration's new tariffs, Bitcoin will also be one of the assets that investors liquidate to pay the bills if they're unemployed. And there won't be as much buying pressure from anyone if daily living expenses rise sharply and constrain investment spending, which is a direct and expected consequence of the new tariffs.
Perhaps the biggest indirect risk of all is that Bitcoin's price will simply be pulled down along with major indexes because of the coin's increasing level of integration with the traditional financial system. In this context, it would be along for the unpleasant ride due to awful market sentiment based on real concerns about economic disruption caused by the tariffs. If this risk occurs in isolation, without any real damage to the U.S. economy, it would be a smart opportunity to buy the coin aggressively -- but don't bet on it. The more likely case is that there will be concrete problems ahead that will take longer to dissipate than merely fearful sentiment would.
Despite all of the above, Bitcoin is still worth buying and holding. Its scarcity is not going to ease as a result of tariffs or any recession caused by tariffs.
Just be aware that you will need to hold it for a long time, potentially years, to erase any losses that might happen as a result of the tariffs. Trade policies come and go, and the investors who can hold on to their coins for long enough to survive until the winds change will probably be rewarded, even if it will be quite uncomfortable in the meantime.
