The crypto market continued to collapse on Monday as a hoped-for reprieve from President Trump's tariffs has failed to materialize. While the stock market has recovered some of its decline, crypto continues to be in the red across the board.
Bitcoin (BTC +1.32%) is down 4.4% in the past 24 hours as of 1:15 p.m. ET, and is down 7.6% from Friday's close. Ethereum (ETH +2.75%) has fallen 9.8% in the past day and 15% since Friday, and Dogecoin (DOGE +0.03%) is down 8.4% and 14.5%, respectively, in that time.
CRYPTO: BTC
Key Data Points
Tariffs and the risk to trade
Cryptocurrencies may be sold as an asset class that runs counter to traditional markets, but that's not really the case. Bitcoin and other cryptocurrencies trade correlated to growth stocks, climbing when the market is putting on higher-risk trades in high-growth companies. But when the market drops, the opposite happens: Growth stocks plummet, and crypto often goes with it.
What's happening today is a continued sell-off because of the tariffs President Trump announced last week. The market seems to be realizing that tariffs are here to stay, and if threats of higher tariffs on China are true, the trade war may escalate from here.
Cryptocurrencies and an uncertain economy
While the trade war doesn't directly impact cryptocurrencies, there's a big indirect impact.
Most cryptocurrencies aren't "productive assets," meaning they don't generate earnings for owners. Instead, they are a digital asset, which has increased in value over the past decade as investors poured money into the industry. Buying pressure has pushed values higher.
But a trade war and ensuing recession could cause an outflow of money as traders realize losses and long-term investors capitulate or need capital for more everyday uses.
We haven't seen how investors will treat digital assets during a normal recession because most of these assets were created after the Great Recession. Crypto was arguably one of the biggest beneficiaries of the COVID-19 pandemic response because stimulus checks and increased trading during that time pushed risk asset values higher.
The future of crypto
While the price of crypto assets will continue to be volatile, the direction will likely depend on what happens with the U.S. economy. Economists are increasing their probability of a recession in 2025, which could push markets even lower, including crypto.
Inflation may also push higher, but crypto hasn't proven to be a good hedge against inflation in the past. During 2022, when interest rates rose to fight inflation, the value of cryptocurrencies fell. If inflation rises this year because of tariffs, don't assume crypto will be a safe haven.
I think the lesson of the last five years is that cryptocurrencies will struggle if the economy is weak and interest rates are rising. And it looks like both may happen simultaneously this year, driven by tariffs.
I'm not buying crypto on the dip today and would be skeptical of its recovery this year. Unless the trade war is called off, which doesn't seem likely, this decline could last for a while.
