Usually, the problem with politicians is that they do not do what they were elected to do. But every so often, a politician comes along who does what he (or she) had promised, which can cause even greater problems. In the last newsletter we wrote: ‘The impact of possible Trump tariffs on the economy and trading partners such as China, Mexico and the EU is a great unknown that spooks markets. In a worst case scenario, tariffs could hurt partner exports which would result in an overall economic backlash for everyone.‘ An estimated $10+ billion of liquidations in crypto markets as well as a major equities selloff later, this has now played out.
First things first though, lets take a step back. The first sign that not all is great in this bull market was the DeepSeek panic on January 27th. DeepSeek, the Chinese AI company, released AI models that were trained using significantly less costly hardware than Western equivalents. Nvidia and other tech stocks led the sell-off. Cryptos, altcoins in particular, followed suit. We may have secretly suspected it but maybe those AI crypto agent coins were not the future of AI technology after all.
The real bloodbath followed on Saturday February 1st. In a sweeping announcement, US President Trump imposed 25% tariffs on goods imported from Mexico and Canada. Trump also imposed an additional 10% tax on imports from China and promised incoming tariffs on EU imports. Without going too deep into any economic analysis or game-theory interpretation of this move, markets did take the news badly. With equities not trading over the weekend, it was Crypto that took the brunt of the initial hit. Ethereum dropped from $3,3000 to briefly touch $2,000. Crypto total market cap dropped by around 10%.
While comparisons to the COVID crash are still far off, the blood in the streets is real. The USD notional amount of liquidations in crypto was higher than at any point, including during the FTX crash. Maybe mortgaging the house to go max-long Fartcoin was not a long-term investment strategy after all.
Only one asset has weathered the storm comparatively well: Bitcoin. Whilst BTC dropped below $100k, it did not dip much lower. But the average crypto trader today, chasing the 10-100x, is heavily underexposed to Bitcoin. The sentiment, already at a low point previously, has hit Bear market despair levels. The signs though were there for weeks. Ever faster capital rotations between ‘market Metas’ and ever wilder memecoin launches are usually a solid indicator of market overexcitement. Bitcoin has already bounced back, but the average trader’s tier 3 memecoin might not.
Right now it is hard to feel much positivity. If one wished to look for it though, we still have not seen an ETH all-time-high this cycle. Solana has just barely crossed its previous ATH. A strongly pro-crypto US administration has barely had a full month in office. Trade wars, and even physical wars, eventually end. And as always, if the economy tanks in reaction to tariffs, Central Banks are more likely to flood markets with liquidity. These are not great things to have to hope for but it seems more likely than not that this episode will turn out to be a bull market flush, not the beginning of a bear market.