It’s been an exciting few months for the crypto world, especially here in the US! There’s a real buzz around what seems like a friendlier approach to crypto regulations. And honestly, the optimism feels justified. After all, the US president now has his own meme coin (talk about embracing the times!), and the SEC has even hinted at easing up on crypto enforcement. Plus, just last month, the White House dropped its crypto executive order, all in the name of bringing some much-needed clarity to the regulatory landscape.

Adding to the positive vibes, under Trump’s administration, the Securities Exchange Commission also introduced SAB 122. This is widely considered a move that could really pave the way for wider crypto adoption. And beyond that, there’s a growing movement pushing for a Bitcoin reserve – and not just in the US, but potentially on a global scale.

Despite all this encouraging news, recent events have thrown a bit of cold water on the party. The past week has really highlighted something important: crypto is now more sensitive to what’s happening in the broader economy than ever before. Case in point? On the very day President Trump announced tariffs on goods from China, Canada, and Mexico, the crypto market took a $2 billion hit, according to Coinglass data.

And it might have been even more dramatic than that. Some experts are suggesting that liquidations actually topped $10 billion – which is a bigger shakeup than we even saw during the FTX collapse. It’s possible market dynamics like “buy the rumour, sell the news” played a role in how the crypto market reacted.

Right now, we’re in a bit of a holding pattern with these tariffs. Trump has agreed to push back the tariffs on Canada and Mexico for a month. But if these tariffs do get implemented, they could seriously increase the chances of a recession by tightening consumer spending and creating even more economic uncertainty.

Tariffs as a Catalyst for Economic Contraction

Let’s break down how tariffs work. Essentially, they’re like a tax on goods coming into a country. The idea behind them is to shield local industries by making imported products pricier. However, this protectionist approach isn’t without its downsides. When tariffs make things more expensive, people tend to buy less.

And that’s a big deal because consumer spending is the engine of the US economy, driving about 68% of the U.S. GDP. So, if people start spending less consistently, it can push the entire economy below the level needed to avoid a recession.

It’s not just about spending, either. Jobs are also on the line across the board. Those 25% tariffs that have been discussed could lead to a 0.25% decrease in jobs in the US. But the impact would be much larger for our neighbors, with projections suggesting both Canada and Mexico could see job losses as high as 3%.

Personally, I think these tariffs could trigger some significant ripple effects. Experts at Deutsche Bank have also pointed out that sustained tariffs against Canada and Mexico—two of America’s biggest trading partners—would have a much “larger economic impact” compared to the UK’s experience with Brexit.

Considering how much the US economy relies on consumer spending, and how closely linked the economies of Canada and Mexico are to trade with the US, it’s not an exaggeration to say that Canada and Mexico could be heading into a recession in the coming months if those 25% tariffs are actually put in place.

The Trade War Escalation and Its Broader Impact

Many people in the business world were anticipating that these tariff moves would disrupt global trade, increase the cost of making goods, and ultimately raise prices for everyone. As companies both in the US and internationally try to rework their supply chains, the uncertainty created by these policy shifts can further slow down economic activity.

We saw a taste of this market volatility in crypto markets last week. When Trump agreed to postpone the tariffs on Canada and Mexico for a month, Bitcoin’s price bounced back up from $92,000 to over $100,000.

But the good news didn’t last long. When China responded with its own tariffs, the price of Bitcoin quickly dropped back down to around $96,000 within hours. This rapid up-and-down movement really underscores just how reactive markets have become to news related to tariffs.

Inflation Risks and Federal Reserve Dilemma

Officials at the Federal Reserve have also been raising red flags about the potential for large-scale tariffs to fuel inflation. While they haven’t directly linked these policies to their upcoming decisions about monetary policy, their warnings are definitely worth paying attention to.

Just recently, Chicago Fed President Austan Goolsbee highlighted several supply chain dangers associated with implementing tariffs. Tariffs increase the cost of imports, and when these higher costs get passed on to us, the consumers, inflation picks up speed.

This is a worrying scenario because inflation eats away at people’s real income, and can make recessionary pressures even worse by further reducing how much people are spending. The Fed is in a tough spot.

On the one hand, the central bank wants to keep inflation under control by tightening monetary policy – think raising interest rates.

However, being too aggressive with interest rate hikes could amplify the negative economic effects of a tariff-driven slowdown.

Gold Remains the Primary Safe-Haven Assets

While digital assets like Bitcoin have struggled to find their footing amidst the rising trade tensions, more traditional safe-haven investments have seen a resurgence in demand. According to data from The Kobeissi Letter, gold hit an all-time high on February 3rd.

This surge in gold prices shows investors are looking for safety as market volatility and inflationary pressures increase. The reasoning behind this shift is pretty straightforward. As tariffs push up prices for consumers and disrupt global trade, investors are becoming more cautious about the long-term economic outlook.

With the risk of recession and the possibility of further tightening of monetary policy, gold’s stability makes it a really appealing place to park your money right now.

Looking Ahead

The next few weeks are going to be critical. If the U.S. continues down this path of aggressively imposing tariffs without getting significant trade concessions in return, we could very well see inflation get worse and market volatility stick around.

At the same time, we could also see recessions start to take hold in some of our key trading partner countries. It’s crucial for policymakers—and investors—to understand that the consequences of trade protectionism go way beyond just international commerce.

In the end, while some might argue that these tariffs are a way to force a renegotiation of trade agreements, the evidence suggests that the risk of recession—and the damage it could do to consumer confidence and global financial stability—is just too big to ignore.