The following is a guest article from Agne Linge, Head of Growth at WeFi.

Over the last few months, the crypto industry has celebrated an evident pro-crypto shift in the US regulatory space. The optimism is well founded — the US president has his own meme coin, the SEC has vowed to lower crypto enforcement, and last month, the White House released its crypto executive order to establish regulatory clarity.

Under Trump’s term, the Securities Exchange Commission implemented SAB 122 — said to pave the way for crypto adoption. There’s also a strong push towards a Bitcoin reserve — not just in the US but globally.

Despite this optimism, recent events show that crypto is increasingly vulnerable to macroeconomic factors. On the day President Trump announced tariffs on China, Canada, and Mexico, the crypto market lost $2 billion, according to Coinglass data.

Some experts report original liquidations exceeding $10 billion — worse than during the FTX fallout. Factors like “buy the rumor, sell the news” may have influenced the market.

Currently, there’s a brief pause on tariff implementation as Trump has postponed the Canada and Mexico tariffs by a month. Implementing these tariffs could risk a recession by constraining consumer spending and increasing economic uncertainty.

Tariffs as a Catalyst for Economic Contraction

Tariffs act as taxes on imported goods, aimed at protecting domestic industries by making foreign products more expensive. However, this protectionism has costs. When tariffs raise goods prices, consumer spending tends to drop.

With consumer spending comprising about 68% of the U.S. GDP, a sustained consumption reduction could push economic activity below recession thresholds.

Employment would also suffer. The discussed 25% tariffs could lead to a 0.25% job loss in the US, with Canada and Mexico facing up to 3% job losses.

Imposing these tariffs could have severe spillover effects. Analysts at Deutsche Bank argue that long-term tariffs against Canada and Mexico — two of the US’s largest trading partners — could have a larger economic impact than Brexit on the UK.

Given the significance of U.S. consumer spending and neighboring economies’ sensitivity to trade volume shifts, it’s not an exaggeration to predict that Canada and Mexico could slip into recession within months if the tariffs are enacted.

The Trade War Escalation and Its Broader Impact

Many stakeholders predicted these moves would harm international trade, increase production costs, and raise prices. As companies adjust supply chains, the uncertainty accompanying policy shifts may further curb economic activity.

Last week, crypto markets reflected the volatility from these policies. Upon Trump agreeing to delay tariffs on Canada and Mexico, Bitcoin’s price rose from $92,000 to over $100,000.

However, this relief was short-lived as China retaliated with its own tariffs, causing Bitcoin’s price to drop back to around $96,000. This rapid fluctuation underscores market sensitivity to tariff-related news.

Inflation Risks and Federal Reserve Dilemma

Federal Reserve officials have expressed concerns about the inflationary impacts of large-scale tariffs. While they haven’t directly linked these policies to upcoming monetary decisions, the warnings are significant.

Earlier, Chicago Fed President Austan Goolsbee highlighted the supply chain threats posed by tariffs, which raise import costs. As these costs get passed to consumers, inflation accelerates.

This scenario raises worries since inflation erodes real incomes and may worsen recessionary pressures by diminishing overall consumer spending. The Fed’s challenge is clear.

On one hand, they aim to control inflation through tighter monetary policy. On the other hand, an overly aggressive interest rate stance could worsen the negative ramifications of tariff-induced economic slowdowns.

Gold Remains the Primary Safe-Haven Asset

While digital assets like Bitcoin struggle with stability amidst rising trade tensions, traditional safe-haven assets have seen renewed demand. Gold, for instance, reached an all-time high on February 3.

This gold price rally reflects investors’ tendency to seek refuge amid heightened market volatility and inflationary risks. The reasons for this shift are straightforward: as tariffs raise consumer prices and impact global trade, investors grow wary about the long-term economic outlook.

With a recession risk and potential for further monetary tightening, gold’s relative stability makes it increasingly appealing.

Looking Ahead

The coming weeks will be crucial. If the U.S. continues its aggressive tariff policy without securing significant trade concessions, we may see rising inflation and persistent market volatility.

At the same time, we could anticipate recession onset in key partner economies. Policymakers and investors must understand that the costs of trade protectionism reach far beyond immediate international commerce.

While some argue these tariffs may eventually force trade renegotiations, evidence suggests the recession risk — along with damaging effects on consumer confidence and global liquidity — is too significant to overlook.