Is Trump’s Tariff War About to Crush Bitcoin and Crypto?

Trump’s latest tariffs are here, and the crypto market is collapsing. Could this economic shock push Bitcoin into another free fall, or is the worst already over?

Trump doubles down on tariffs

Global financial markets are once again in turmoil, with U.S. President Donald Trump’s latest tariff announcment sending shockwaves across stocks, commodities, and crypto. 

The U.S. president on Feb. 27 announced a new 10% tariff on Chinese goods—on top of the existing 10% levies—alongside a looming 25% duty on imports from Canada and Mexico. Investors reacted swiftly, hitting the panic button as these measures deepened market uncertainty.

The crypto market, already under stress, has experienced a sharp decline. As of Feb. 28, the total market cap has dropped over 8% in the last 24 hours, now sitting at $2.64 trillion—down more than 25% from its $3.52 trillion peak at the start of the month.

Bitcoin (BTC), the market leader, has also suffered one of its steepest drops in months, plunging nearly 8% to trade around $80,000. At its lowest point, BTC touched $78,200 before staging a modest recovery.

Altcoins have fared even worse, with many seeing double-digit losses as traders rushed to cash out. Ethereum (ETH), for instance, has fallen nearly 10%, now hovering around $2,150.

This sharp decline follows an earlier wave of tariff fears on Feb. 3, which triggered a similar sell-off. However, diplomatic negotiations provided temporary relief. 

Mexico President Claudia Sheinbaum secured a 30-day pause on the measures, allowing border security talks to continue, particularly regarding U.S. concerns over drug trafficking. 

Canadian Prime Minister Justin Trudeau soon after followed suit. Trump was quick to confirm that tariffs would be delayed as both nations worked to address these concerns.

But the relief was short-lived. Trump’s latest comments on Truth Social suggest he remains dissatisfied, accusing both Mexico and Canada of failing to curb the flow of fentanyl into the U.S. 

With the Mar. 4 deadline fast approaching, tensions are once again at a boiling point, and the tariff pause may soon be lifted.

For the crypto market, this comes at an especially fragile moment. Unlike in previous cycles, where Bitcoin and other digital assets traded largely in isolation from traditional markets, the past year has seen a growing correlation with broader macroeconomic forces. 

What happens next? If these tariffs are implemented, how deep could the next market shock run? And with the crypto market already on edge, could we see another major shake-up in the coming days? Let’s break it down.

How trade tariffs could set off a chain reaction in crypto

Trade wars are rarely isolated events. They ripple across financial markets, shifting liquidity, reshaping inflation expectations, and forcing central banks to recalibrate their policies. 

If Trump follows through with his tariffs on Mexico and Canada while also imposing additional 10% levies on China, the outcome could set off a full-scale inflationary shock, putting the Federal Reserve in a tough spot and potentially deepening the sell-off in crypto markets.

The core issue is that tariffs act as a tax on imported goods. When businesses face higher costs on foreign products, they don’t absorb the losses—they pass them on to consumers. This leads to a surge in the price of everyday goods, from electronics to food, fueling inflation.

With U.S. inflation already above the Fed’s 2% target, hovering around 3% in January, the introduction of additional tariffs could push it even higher, forcing the Fed to reconsider its stance on rate cuts.

Here’s where the crypto market comes into play. Bitcoin and digital assets have historically thrived in low-rate environments when excess liquidity drives speculative investments. Increased inflation or dried-up liquidity could trigger market shocks. 

Moreover, since mid-2023, Bitcoin has been trading more like a risk asset than an inflation hedge, with its correlation to the Nasdaq 100 and S&P 500 reaching record highs. 

When stock markets tumble during periods of uncertainty, the cascading effects could dampen crypto momentum.

As inflation rises due to trade tariffs and the Fed opts to raise interest rates, liquidity could tighten further as traders flock to the U.S. dollar. 

The dollar, often seen as the “least risky risky asset,” has recently strengthened to its highest level against the Canadian dollar since 2003, reflecting a broader trend of capital flight away from speculative assets.

We’ve already seen a preview of what happens when liquidity dries up. February’s flash crash wiped out nearly $760 billion in just 60 hours, with Bitcoin plunging in sync with other risk assets. 

If trade tensions trigger another layer of inflationary pressure, we could see a similar scenario unfold, with investors rushing to the safety of the U.S. dollar, gold, and other defensive assets—leaving Bitcoin vulnerable to another sharp decline.

How retail and institutional investors could react

The market’s reaction to tariffs wouldn’t just hinge on inflation; it would also be driven by sentiment and positioning. Right now, Bitcoin ETFs play a crucial role in capital flows within the crypto market, and their behavior indicates that investors are already on edge.

Since Trump’s election, Bitcoin ETFs have seen record-breaking inflows, with $2 billion pouring in within just 48 hours. But that momentum has shifted. 

Outflows have dominated for eight consecutive trading days as of Feb. 27, totaling $3 billion, including a single-day record withdrawal of $1 billion on Feb. 25—the highest ever. 

This pattern suggests that retail traders, who make up a significant portion of the market, are moving in herds, exiting en masse when volatility spikes. The danger here is that tariffs could introduce a fresh catalyst for panic. 

If inflation rises and the Fed signals that rate cuts will be delayed, we could see even deeper ETF outflows, creating “air pockets” in the market where Bitcoin experiences sudden and extreme price swings.

At the same time, institutional investors, who have been increasing their exposure to Bitcoin through ETFs, may start to rethink their allocations. 

Hedge funds and asset managers entered the crypto space expecting long-term gains, but they remain sensitive to macroeconomic conditions. 

If the cost of capital stays high due to prolonged Fed tightening, risk-adjusted returns for Bitcoin may start looking less attractive compared to other investments.

Hence, a sustained shift in institutional sentiment could accelerate Bitcoin’s decline, reinforcing a cycle of volatility.

Moreover, what’s different this time is the scale of the crypto market. During the last major trade war between the U.S. and China in 2018, the total crypto market was valued at around $300 billion. 

Today, it’s worth over ten times that amount, with far deeper institutional involvement and exposure to global financial flows. This means any macro-driven shock—whether it’s tariffs, inflation spikes, or rate hikes—has the potential to trigger broader disruptions than ever before.

Where does crypto go from here?

The crypto market finds itself at a crossroads, caught between short-term panic and long-term positioning. With Bitcoin plunging 26% from its highs and the fear and greed index hitting levels last seen during the Luna collapse, sentiment is extremely bearish.

Analysts are divided, but a common thread runs through their assessments: this downturn may not last much longer.

Arthur Hayes, for instance, predicts another sharp drop on the horizon. He warns that the market is making lower lows and could see “one more violent wave down below $80K” before stabilizing. 

However, he also hints at a quieter period to follow, suggesting that once this shakeout is over, the market might enter a phase of relative calm.

Julien Bittel, Head of Macro Research at Global Macro Investor, takes a more structural approach. He argues that the entire market downturn, including Bitcoin’s drop, is a direct consequence of tighter financial conditions from late last year. 

Yet, Bittel sees this cycle already reversing. “Financial conditions have been easing rapidly over the past two months,” he points out, citing falling bond yields, a weaker dollar, and lower oil prices as early signs that the tide is turning. 

With Bitcoin now at an RSI of 23—the most oversold level since August 2023—Bittel suggests that those still leaning bearish “shouldn’t get too comfortable.”

Technical analysts are also spotting potential inflection points. Edward Morra notes that Bitcoin is nearing the completion of a key CME breakout gap from last year. 

While the market “looks absolutely wrecked,” he argues that this is actually setting up for a strong bounce. According to Morra’s data, nearly 90% of these gaps eventually get filled, which would suggest a move back toward the $93,000 range.

Meanwhile, Michaël van de Poppe focuses on sentiment, pointing out that fear has reached extreme levels at a time when the U.S. government is more pro-crypto than ever. 

“I would say this is going to reverse quickly,” he predicts, estimating that the bottom is likely just “one to two weeks away.”

While the market may be oversold, that doesn’t mean it can’t go lower. Though some signs point to a potential bounce, the broader picture remains uncertain. 

If liquidity continues to improve and inflation stays under control, a recovery could be on the horizon. However, if macro conditions worsen, this could be just another stop on the way down.

For now, traders should remain cautious. Fear may be a contrarian signal, but blindly assuming a reversal could be just as risky. The golden rule remains: trade wisely and never invest more than you can afford to lose.