Author: Wengou Diary Source: X, @winterdog_dog

1. Macroeconomic impact: trade structure, capital flows and supply and demand for US bonds

At 4 a.m., when Trump took out the new tariff table in high spirits, the world was caught off guard. I believe everyone has witnessed what happened last night. Trump once again waved the tariff stick in an attempt to reverse the long-term trade imbalance. This tariff strategy may reshape the U.S. trade structure and capital flows in the short term, but it also hides a new impact on the U.S. Treasury market. The core is that tariffs may lead to a decline in foreign demand for U.S. bonds, and the Federal Reserve may need more monetary easing to maintain the operation of the Treasury market.

So, what should we think of everything that has been impacted by the tariffs? Is there any rescue? How to save it? Specifically, there are roughly several aspects:

Trade structure: High tariffs aim to reduce imports, encourage local production, and thus narrow the trade deficit. However, the practice of "treatment for headaches" is often accompanied by side effects: rising import costs may push up inflationary pressure, and other countries will also weaken U.S. exports if they impose retaliatory tariffs. Trade imbalances may be suspended, but the pain of supply chain restructuring and rising prices is inevitable. As the saying goes, pressing the trade deficit can also cause inflation.

International capital flows: When US imports decrease, it means that the US dollar flows overseas will become less - "no exports will be no US dollar" has caused the hidden concerns of the US dollar shortage worldwide. The dollar reserves in overseas trading partners have decreased, emerging markets may face tight liquidity, and the global capital flow pattern has changed. When the US dollar is short, funds often return to the United States or hide in safe-haven assets, impacting the stability of overseas asset prices and exchange rates.

U.S. bond supply and demand: Over the years, the huge trade deficit in the United States has allowed a large amount of US dollars to be held overseas, and these US dollars often return to the United States by purchasing US bonds. Now that tariffs compress the outflow of the US dollar, foreign investors lack "ammunition" to buy US bonds. But the US fiscal deficit is still high, and the supply of treasury bonds has increased. If foreign demand weakens, who will take over the emerging U.S. bonds? The result is likely to be the rise in U.S. bond yields, the increase in financing costs, and even the risk of insufficient liquidity. Trump is trying to balance the trade accounts, but he may tear down the east wall and repair the west wall in the US bond market, laying new hidden dangers.

In general, tariffs are like drinking poison to quench thirst on the macro level: repairing trade imbalances in the short term, but weakening the momentum of the US dollar in the global cycle. This shift in balance sheet is tantamount to transferring pressure from trade to capital, and the US Treasury market is the first to be affected. One bottleneck in the macro-funded flow will soon burst out in another place - the Federal Reserve has to prepare a fire faucet to put out the fire.

2. US dollar liquidity: The decrease in exports triggers a US dollar shortage, and the Federal Reserve restarts "Brrrr"

When overseas dollar supply tightens due to the cooling of trade, the Federal Reserve will inevitably take action to bail out US dollar liquidity. As the above logic, foreigners cannot buy U.S. bonds without making a dollar. Arthur Hayes mentioned that "the only thing that can fill the gap is the central bank and banking system in the United States" (Arthur Hayes: Tariffs may lead to a decline in foreign demand for U.S. bonds, and the Federal Reserve may snow more monetary easing to maintain the operation of the Treasury bond market-PANews). What does this mean? In the words of the currency circle, it means that the "Brrrr" sound of the United States' money printing machine will be heard again.

https://x.com/CryptoHayes/status/1907698822752694342

In fact, Federal Reserve Chairman Powell has hinted in a recent meeting that a possible restart of quantitative easing (QE) may soon be restarted and focus on buying U.S. Treasury bonds. This statement proves that the official also realizes that maintaining the operation of the treasury bond market is inseparable from additional US dollar liquidity. Simply put, the US dollar shortage can only be solved by "large release". The Federal Reserve's expansion of balance sheets, lowering interest rates, and even using the banking system to buy bonds together are all on the verge of arrows.

However, this liquidity firefighting is doomed to be accompanied by a dilemma: on the one hand, timely injecting US dollar liquidity can calm the interest rate of treasury bonds and alleviate the risk of market failure; on the other hand, flooding the market will sooner or later breed inflation and weaken the purchasing power of the US dollar. The supply of US dollar has changed from emergency to overflowing, and the value of US dollar will inevitably fluctuate violently. It can be foreseen that in the roller coaster of "draining first, then letting go", the global financial market will experience a violent sway from strengthening (distance) to weakening (indiscriminately). The Federal Reserve has to walk a tightrope between stabilizing the bond market and controlling inflation, but at present, ensuring the stability of the Treasury bond market is the top priority, and "printing money and buying bonds" has become an inevitable choice. This also declares a major turning point in the global dollar liquidity environment: from tightening to loosening. Historical experience has repeatedly proved that once the Fed opens its gates and releases water, the flood will eventually flow to every corner - including the crypto market.Risk assets field.

2. Impact on Bitcoin and crypto assets: inflation hedging and the rise of "digital gold"

The signal that the Federal Reserve restarts the money printing machine is almost a blessing for crypto assets such as Bitcoin. The reason is simple: When the US dollar is flooded and expectations of credit currency depreciation heat up, rational capital will look for a reservoir to resist inflation, and Bitcoin is the highly anticipated "digital gold". The limited supply of Bitcoin has increased its charm in this macro context, and its value support logic has never been so clear: when fiat currency continues to "light", hard currency assets will "heavier".

As Arthur Hayes pointed out, the Bitcoin market "remains entirely on the market's expectations for future fiat currency supply" (Bitcoinprice can hit $250K in 2025 if Fed shifts to QE:ArthurHayes). When investors expect the supply of US dollar to expand greatly and the purchasing power of paper money declines, safe-haven funds will flow into assets such as Bitcoin that cannot be over-issued. Looking back at the situation in 2020, Bitcoin and gold fly together after the Federal Reserve's large-scale OE is proof of this. If the floodgates are opened again, the crypto market is likely to repeat this scene: digital assets usher in a new wave of valuation rising. Hayes boldly predicts that if the Fed shifts from tightening to printing money for Treasury bonds, Bitcoin is expected to bottom out at about $76,500 last month, and will climb all the way next, hitting a sky-high price of $250,000 by the end of the year. Although this prediction is radical, it reflects the strong confidence of the currency circle KOLs in the "inflation dividend" - additional printing of banknotes will eventually push up the price of scarce assets such as Bitcoin.

In addition to expectations of price increases, this round of macro upheaval will also strengthen the narrative of "digital gold". If the Fed's money release triggers market distrust of the fiat currency system, the public will be more inclined to regard Bitcoin as a means of value protection against inflation and risk, just like people embraced physical gold in the past chaotic times. It is worth mentioning that people in the encryption circle have long been accustomed to short-term noise. Just like investor James Lavish, he sarcastically said: "If you sell Bitcoin because of the 'tariff' news, it means you don't understand what you are holding" (Bitcoin (BTC) Kurs: Macht ein Verkaufnoch Sinn?). In other words, smart coin holders know that the original intention of Bitcoin was to fight against over-issuance and uncertainty; every money printing and mistake further proves the value of holding Bitcoin as an alternative asset insurance. It can be predicted that as the US dollar expands its balance sheetAs expectations heat up, safe-haven funds increase allocation, the image of Bitcoin's "digital gold" will be more deeply rooted in the hearts of the public and institutions.

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IV. Potential impact on DeFi and stablecoin markets: Stablecoin demand and yield curve under US dollar fluctuations

The sharp fluctuations in the US dollar not only affect Bitcoin, but also have a profound impact on stablecoins and DeFi fields. USDT and USDC, as USD stand-in for the crypto market, their demand will directly reflect investors' expectations of US dollar liquidity. In addition, the on-chain lending interest rate curve will also change with the macro environment.

Stablecoin demand: When the US dollar is in short supply, offshore markets often "save the country in a curve" through stablecoins. When it is difficult to obtain the US dollar overseas, USDT often has premium transactions off the market, because everyone is grabbing the straw of digital US dollar. Once the Fed makes a big splash, the new US dollar is likely to flow into the crypto market, driving USDT/USDC issuances on a large scale to meet trading and safe-haven demands. In fact, the issuance of stablecoins over the past few months has shown that this progress has actually begun. In other words, whether the US dollar strengthens or weakens, the demand for stablecoins only increases and does not decrease: either seek replacement because of the lack of US dollars, or move funds to the chain for temporary avoidance because of fear of depreciation of fiat currency. Especially in emerging markets and regions with strict supervision, stablecoins play the role of a substitute for the US dollar. Every fluctuation in the US dollar system has strengthened the presence of the "$crypto-dollar" stablecoins. It can be imagined that if the US dollar enters a new round of depreciation cycle, investors may rely more on USDT and other stablecoins to turn around in the currency circle in order to preserve their assets, thereby pushing the market value of stablecoins to hit a new high.

DeFi yield curve: The tightness of the liquidity of the dollar will also be transmitted to the DeFi lending market through interest rates. During the US dollar shortage, the on-chain dollar became valuable, and the interest rate borrowing Stablecoin soared, and the DeFi yield curve rose steeply (the lender demanded higher returns). On the contrary, when the Fed's water release caused the market to be abundant and traditional interest rates to fall: the interest rates of stablecoin in DeFi became relatively attractive, attracting more funds to flow into the chain to obtain returns. An analysis report pointed out that under the expectation of the Fed entering a rate cut channel, DeFi yields began to become attractive again, the size of the stablecoin market has rebounded to a high of about $178 billion, and the number of active wallets has stabilized at more than 30 million, showing signs of recovery. As interest rates decline, more fundsPerhaps the switch to the chain to gain higher returns will further accelerate this trend. Bernstein analysts even expect stablecoins to recover to more than 5% on DeFi as demand for crypto credit grows, surpassing the returns of U.S. money market funds. This means that DeFi has the potential to provide relatively better returns in a low-interest rate macro environment, thereby attracting the attention of traditional capital. But it should be noted that if the Fed's loosening ultimately triggers a rise in inflation expectations, stablecoin lending rates may also rise again to reflect the risk premium. Therefore, the yield curve of DeFi may be repriced in the fluctuation of "down first, up later": first flattening due to abundant liquidity, and then steeping under inflationary pressure. But overall, as long as the US dollar liquidity is flooded, a large amount of capital will influx into DeFi's trend of seeking returns will be irreversible, which will not only push up the prices of high-quality assets, but also lower the risk-free interest rate level, causing the entire return curve to shift in a direction that is beneficial to borrowers.

To sum up, the macro chain reaction triggered by Trump's tariffs will profoundly affect all aspects of the crypto market. From the macro economy to the liquidity of the US dollar, to the Bitcoin market and the DeFi ecosystem, we are witnessing a butterfly effect: the trade war triggered a currency storm, and the US dollar was in a violent ups and downs, Bitcoin was ready to go, while stablecoins and DeFi were ushering in opportunities and challenges in the cracks. For crypto investors with a keen sense of smell, this macro storm is both a risk and an opportunity - as the popular saying in the currency circle: "The day the central bank prints money is the time when Bitcoin takes the throne." Objectively, the violent tariff model actually promotes the occurrence of this process. Maybe OE is getting closer and closer because of this. Although I don’t like to talk about narratives like “a big game”, it seems that this is the most positive and clear angle at the moment.