There were heavy losses in US markets on Thursday after President Trump announced the implementation of significant new tariffs on China as early as next weeks.
These tariffs will amount to approximately $50 billion on a yearly basis for Chinese exports. There is widespread fear that China will retaliate and financial market across the world will be plunged into further turmoil.
The Dow Jones was down 724.42 points for the day, which represents a 2.93% decrease. Analysts expect there to be further decreases before the weekend. Some are even going so far as to say this could represent the beginning of a reversal of the multi-year bull trend responsible for the record highs of the past few months.
The question on a lot of people’s minds is whether or not the falling Dow Jones present an opportunity for cryptocurrencies.
Why is this trade war such a big deal?
While President Trump has been threatening the introduction of trade tariffs for some time, they have finally become a reality. He wants to create a more protectionist economy whereby home-grown businesses can reap the benefits of this change in policy.
China has been one of his main targets since taking office, as he blames them for causing significant damage to US manufacturers and employment. There is no doubting that China will not take this move lightly.
How could this trade war be good for cryptocurrencies?
While tariffs may appear to be a good idea on paper as they should protect the economy, in reality, it generally only ends up benefitting a small segment of the economy, with the rest of it suffering.
The US Dollar will weaken as a result of this approach, and it may open up a move for more institutions to conduct transactions using cryptocurrencies.
Rather than having to deal with a weakening US Dollar, people may turn to using cryptocurrencies for their transactions and to store their wealth.
Bitcoin, for example, has been dubbed “digital gold” and it is at volatile times that investors put their money in more conservative investments such as that of gold. Gold will usually retain its value as the financial markets worsen.
Cryptocurrencies may also be used to get around the trade restrictions that are in place. This means that significant fees and penalties can be avoided (albeit illegally) and transactions can go on as normal.
If the use of crypto becomes common practice, many institutions will realize the many benefits associated with this approach and may not return to fiat currencies when volatility in those markets has stabilized.
An event like this trade war could be the catalyst for a more significant and widespread adoption of cryptocurrencies as a medium of exchange.
How might this not work out for cryptocurrencies?
In the world of finance, there are never any guarantees. There has been a massive bull market in the traditional financial word for many years now, with money being awash for institutional investors to spend as they please.
Many had the spare capital to invest in somewhat riskier investments, such as that of cryptocurrencies. However, if this trade war triggers a sustained bear market, this could lead to investments drying up in the crypto sector, dragging it into a bear market with the rest of the economy.
In a previous article, I theorized that that as financial market fears increase, the price of bitcoin decreases and vice versa. So far, I’ve been right.
Whatever happens, this will be fascinating to watch to see how the crypto markets react to sustained levels of turbulence in traditional financial markets as the United States and China battle it out in a trade war.
Featured image from Shutterstock.
Last modified: May 20, 2020 8:57 PM UTC