Bitcoin's Price Weakness Pre-dates Trade War, Driven by Inflation and Risk Aversion

Bitcoin's price has been under scrutiny, with a 2.2% gain on April 1 failing to push it above $89,000 since March 7. The recent price weakness is often attributed to the escalating US-led global trade war. However, several factors had been influencing investor sentiment long before President Donald Trump announced the tariffs.

Some market participants suggested that Strategy’s significant Bitcoin purchases since February were the primary reason BTC held above the $80,000 support. However, the reality is that Bitcoin was already showing limited upside before the announcement of the 10% Chinese import tariffs on Jan. 21. The S&P 500 index hit an all-time high on Feb. 19, exactly 30 days after the trade war began, while Bitcoin had repeatedly failed to hold above $100,000 for the previous three months. This indicates that Bitcoin's price weakness started well before President Trump took office on Jan. 20.

Another data point that weakens the relation with tariffs is the spot Bitcoin exchange-traded funds (ETFs), which saw $2.75 billion in net inflows during the three weeks following Jan. 21. By Feb. 18, the US had announced plans to impose tariffs on imports from Canada and Mexico, while the European Union and China had already retaliated. In essence, institutional demand for Bitcoin persisted even as the trade war escalated.

Part of Bitcoin traders’ disappointment after Jan. 21 stems from excessive expectations surrounding President Trump’s campaign promise of a “strategic national Bitcoin stockpile,” mentioned at the Bitcoin Conference in July 2024. As investors grew impatient, their frustration peaked when the actual executive order was issued on March 6.

A key factor behind Bitcoin’s struggle to break above $89,000 is an inflationary trend, reflecting a relatively successful strategy by global central banks. In February, the US Personal Consumption Expenditures (PCE) Price Index rose 2.5% year-over-year, while the eurozone Consumer Price Index (CPI) increased by 2.2% in March. This suggests that if inflation remains relatively under control in 2025, lower interest rates would favor real estate and stock markets more directly than Bitcoin, as reduced financing costs boost those sectors.

The weakening job market also dampens traders’ demand for risk-on assets, including Bitcoin. In February, the US Labor Department reported job openings near a four-year low. Similarly, yields on the US 2-year Treasury fell to a six-month low, with investors accepting a modest 3.88% return for the safety of government-backed instruments. This data suggests a rising choice for risk aversion, which is unfavorable for Bitcoin.

Ultimately, Bitcoin’s price weakness stems from investors' unrealistic expectations of BTC acquisitions by the US Treasury, declining inflation supporting potential interest rate cuts, and a more risk-averse macroeconomic environment as investors turn to short-term government bonds. While the trade war has had negative effects, Bitcoin was already showing signs of weakness before it began.