The global situation is unpredictable, and although you may have noticed, it is still worth sharing some of Greythorn's insights.
While we are primarily focused on the crypto market, especially after Bitcoin’s post-halving bull rally was confirmed, the market may now be entering a “do nothing phase.” In this phase, most cryptocurrency holders are already invested, and waiting and watching may be a strategy.
For most investors, adopting a long-term perspective can simplify the investment process and reduce the need for frequent adjustments. At present, the best option seems to be either long-term holding or betting on meme coins.
Regardless, this quiet period in the crypto market also provides us with an opportunity to pay attention to the macroeconomy, which inevitably affects the crypto market. After all, Bitcoin and other cryptocurrencies are fundamentally affected by macroeconomic trends. Although the crypto market seems to be stagnant at the moment, the macroeconomic environment is worth exploring.
Today, we want to focus on two important pieces of closely related news:
China sold off a large amount of U.S. Treasuries and agency bonds.
The United States announced a significant increase in tariffs on Chinese imports.
Next, we will conduct an in-depth discussion.
China has steadily accumulated U.S. Treasury debt over the decades, holding as much as 10% of the U.S. Treasury through bonds issued by the federal government. The reasons for this include:
U.S. Treasuries are considered one of the safest investments in the world, offering reliable returns with minimal risk, which is attractive for preserving China's large foreign exchange reserves.
China exports a lot of goods to the United States and earns a lot of dollars. Instead of holding these dollars, China invests them in U.S. Treasury bonds to earn interest.
By purchasing U.S. debt, China helps keep its currency, the renminbi, relatively stable. This stability maintains the competitiveness of Chinese exports because a stable renminbi makes Chinese goods more affordable for American consumers.
Recently, China has been reducing its exposure to US debt. Bloomberg reported that China sold a record amount of US Treasuries and agency bonds in the first quarter. The US is certainly not happy about this development for the following reasons:
The massive sell-off increased the supply of U.S. Treasuries on the market, causing their prices to fall. When bond prices fall, interest rates rise.
Rising interest rates mean the U.S. government needs to pay more to service its debt. Initially, a sell-off in U.S. Treasuries could strengthen the dollar as investors move funds into the greenback to buy the bonds China is selling. However, an increase in the supply of dollars could weaken the greenback over time. Furthermore, 10% is a significant shortfall. Who will fill it? Japan? Given that Japan is also dealing with its yen depreciation, we don't hold out much hope.
Such a move could also affect the value of the dollar relative to the yuan, making Chinese exports more expensive, potentially hurting China's economy. However, China doesn't seem to care too much about this, as de-dollarization is their top priority.
How could the U.S. respond? The Federal Reserve could reenter 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 buy more Treasury bonds.
However, banks need to be compensated with higher yields, which may incentivize them to increase lending, potentially driving up inflation.
Now, let's move on to the second piece of news: The United States announced a significant increase in tariffs on Chinese imports.
President Biden, in apparent response, has unveiled new and increased tariffs on Chinese imports. The tariffs continue punitive measures implemented by the previous Trump administration, which then-candidate Biden criticized as burdening American consumers.
Tariffs on electric vehicles more than quadrupled to 100%, and tariffs on lithium batteries and their components, as well as some steel and aluminum products, more than tripled. In addition, tariffs on semiconductors and solar panels doubled.
New tariffs were also imposed on a long list of critical minerals, magnets, shore-to-ship cranes and medical products.
The move is designed to make Chinese goods more expensive in the United States, thereby encouraging consumers to buy more American-made products. The strategy is expected to hit Chinese manufacturers and exporters, potentially leading to lower incomes and increased job losses in China.
However, there is a major challenge. The United States does not currently have the capacity to increase domestic production like China. To increase domestic activity, fiscal stimulus is needed to help companies build additional capacity to replace more expensive Chinese supply. This basically means more money issuance.
To compensate for these tariffs and “localize” industries that are currently lacking, the fiscal stimulus needed will likely be achieved through more government debt. Given that the U.S. economy is showing signs of slowing, GDP growth cannot be relied upon in the short term to pay for these costs.
About the Crypto Market
So, how does all this affect Bitcoin and the cryptocurrency market? In addition to the sociopolitical instability that could result from the escalation of the situation, a global economic slowdown could reduce disposable income for investing in cryptocurrencies, but this is already happening. In fact, the above scenario leads us to believe that there could be more fiscal stimulus and potential currency issuance to support this conflict, and Bitcoin is often seen as a hedge against inflation.
Furthermore, as governments around the world face economic challenges, the common belief in the past that they would increase regulation of cryptocurrencies is now weakening, at least for Bitcoin. In fact, it seems to be the opposite, with more and more people appreciating its existence. In the long run, if the dollar depreciates due to increased debt and money supply, Bitcoin may benefit as an alternative currency.
