There are very few events market participants are watching more intently than the ongoing trade disputes between the world’s two largest economies. In one corner, the Trump administration has recently stoked the trade war fire with threats of additional tariffs on $300 billion of Chinese imports, on top of the $250 billion worth of Chinese goods that are already subject to such levies. In the other corner, the rising superpower of the East has slapped tariffs on over $100 billion of U.S. goods and is threatening more qualitative measures like disrupting the operations (and expansion) of American companies in China.

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The repercussions are already being felt by both sides as businesses big and small voice their concerns on the shadow of uncertainty that has been cast over them. While the “truce” on trade struck between President Trump and Chinese President Xi this past weekend at the G20 Summit breathed a sigh of relief into markets, a potential trade deal is still far from complete. The implications for crypto, specifically bitcoin, are also a bit muddled depending on how the situation shapes up in the coming months.

In its relatively limited history, bitcoin typically has not performed well during periods when equity market volatility spikes, usually selling off with stocks. However, more recently bitcoin has lived up to its nickname of “digital gold”, trading in line with safe haven assets amid rising trade tensions. The disputes between the U.S. and China have caused many people to seek out assets more isolated from the fallout of a trade war. Given the size of the two adversaries and their influence on the global economy, there are few assets that fit these criteria more aptly than bitcoin and gold. Unsurprisingly, the two have traded closely with one another in recent weeks. This a trend we expect to continue as the Fed’s July FOMC meeting approaches, which the market is now anticipating at least one rate cut with 100% certainty. 

Bitcoin vs. Gold Prices (Last 30 Days)

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Source: Coinbase, ICE, TradingView

Some of the recent demand for bitcoin has come from new institutional capital wading into the market, namely the rising demand from family offices and hedge funds. Another key driver, however, has been its ability to capture a portion of the capital fleeing China in search of alternative store-of-value assets less affected by the potential consequences if the trade situation escalates further.

Bitcoin vs. Weakening Chinese Yuan

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Source: Coinbase, ICE, TradingView

The fallout from the trade war is also starting to show up in key economic indicators. For example, lingering uncertainty has caused many firms to rethink their capital spending plans, which may weigh on the economy longer-term. Major institutions like the World Bank have reduced their forecasts for global growth, citing “rising trade barriers” as one of its key downside risks. This may serve as an indirect catalyst for bitcoin as investors seek out higher growth assets in the face of a weakening economic backdrop, a trend we’ve seen dominate throughout much of the current cycle.

Bitcoin stands to benefit in several ways if the trade truce between the U.S. and China fails to materialize into something more concrete in the coming months. Additional tariffs or actions taken by either side will likely cause more pain for conventional risk assets (i.e. stocks), which may lead to increased demand for bitcoin given the reasons previously discussed. A risk-off move would push yields on sovereign debt, notably U.S. Treasuries, even lower, which reduces the opportunity cost of holding non-income producing assets like bitcoin or gold. 

Bitcoin vs. Yields on U.S. 2-Year Treasuries

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Source: Coinbase, TVC, TradingView

Notably, as the perception of bitcoin transitions more towards a store-of-value asset, it will likely benefit from increased demand among investors starving for growth as well, further bolstering its bull case. It’s very difficult to predict short-term fluctuations in any asset, whether it be U.S. Treasuries, Apple’s stock price, or bitcoin. However, the medium-to-long term set up for bitcoin is primed for it to thrive as we watch its value proposition as digital gold play out right in front of our eyes.