The global situation is unpredictable, and although everyone may have noticed, it is still worth sharing some insights from Greythorn.

While our primary focus is on the crypto market, especially after confirming a bull market rebound post-Bitcoin halving, the market may now be entering a "laissez-faire phase." During this phase, most cryptocurrency holders have already invested, and waiting and watching might be a strategy.

For most investors, adopting a long-term perspective can simplify the investment process and reduce the need for frequent adjustments. Currently, the best options seem to be either holding long-term or betting on meme coins.

Regardless, this quiet period in the crypto market also provides us with an opportunity to focus on the macroeconomy, which inevitably affects the crypto market. After all, Bitcoin and other cryptocurrencies are fundamentally influenced by macroeconomic trends. Although the crypto market currently seems stagnant, the macroeconomic environment is worth exploring.

Today, we will focus on two closely related important news items:

  1. China's massive sell-off of U.S. Treasury and agency bonds.
  2. The U.S. announces a significant increase in tariffs on Chinese imports.

Next, we will delve into these topics.

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

  • U.S. Treasury bonds are considered one of the safest investments globally, offering reliable returns with minimal risk. This is attractive for preserving China's large foreign exchange reserves.
  • China exports a large number of goods to the U.S., earning substantial dollars. Instead of holding these dollars, China invests in U.S. Treasury bonds to earn interest.
  • By purchasing U.S. debt, China helps maintain the relative stability of its currency (the yuan). This stability keeps Chinese exports competitive, as a stable yuan makes Chinese goods more affordable for U.S. consumers.

Recently, China has been reducing its exposure to U.S. debt. Bloomberg reports that China set a record in the first quarter by selling off U.S. Treasury and agency bonds. The U.S. is, of course, unhappy with this development for the following reasons:

  • Massive sell-offs increase the supply of U.S. Treasury bonds in the market, causing their prices to drop. As bond prices fall, interest rates rise.
  • Rising interest rates mean the U.S. government needs to pay more in debt service costs. Initially, selling U.S. Treasury bonds might strengthen the dollar as investors move funds into dollars to buy the bonds China is selling. However, over time, the increased supply of dollars could weaken the dollar. Additionally, 10% is a significant gap. Who will fill it? Japan? Given that Japan is also dealing with its yen depreciation issues, we are not very hopeful.
  • Such a move could also affect the value of the dollar relative to the yuan, making Chinese exports more expensive and potentially harming China's economy. However, China seems less concerned about this as de-dollarization is their top priority.

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

However, banks would need to be compensated with higher yields, which might incentivize them to increase lending, potentially driving inflation.

Now, let's move on to the second news item: the U.S. announces a significant increase in tariffs on Chinese imports.

Seemingly in response, President Biden announced new and increased tariffs on Chinese imports. These tariffs continue the punitive measures implemented by the previous Trump administration, which candidate Biden had criticized for burdening American consumers.

Tariffs on electric vehicles have more than quadrupled to 100%; tariffs on lithium batteries and their components, as well as some steel and aluminum products, have more than tripled. Additionally, tariffs on semiconductors and solar panels have doubled.

The new tariffs also apply to a long list of critical minerals, magnets, ship-to-shore cranes, and medical products.

This move aims to make Chinese goods more expensive in the U.S., encouraging consumers to buy more American-made products. This strategy is expected to hit Chinese manufacturers and exporters, potentially leading to reduced income and increased unemployment in China.

However, there is a significant challenge. The U.S. currently lacks the capacity to increase domestic production like China. To boost domestic activity, fiscal stimulus is needed to help businesses build additional capacity to replace the more expensive Chinese supplies. This essentially means more money printing.

To offset these tariffs and "localize" the currently lacking industries, the required fiscal stimulus might be achieved through more government debt. Given that the U.S. economy shows signs of slowing down, relying on GDP growth to cover these costs in the short term is not feasible.

Regarding the Crypto Market

So, how does all this affect Bitcoin and the cryptocurrency market? Besides the escalation potentially leading to socio-political instability, a global economic slowdown might reduce disposable income available for investing in cryptocurrencies, but this is already happening. In fact, the above situation makes us believe that to support this conflict, there might be more fiscal stimulus and potential money printing, and Bitcoin is often seen as a hedge against inflation.

Moreover, as governments worldwide face economic challenges, the previously widespread belief that they would increase regulation on cryptocurrencies is now weakening, at least for Bitcoin. In fact, the opposite seems to be happening, with more people appreciating its existence. In the long term, if the dollar depreciates due to increased debt and money supply, Bitcoin might benefit as an alternative currency.