The decline of Bitcoin may seem unexpected to some, as rising inflation is often seen as a positive for cryptocurrency due to its role as a hedge.
However, according to Bernstein analysts, the new tariffs have strengthened the dollar and raised inflation expectations, making near-term interest rate cuts less likely. This has tightened global liquidity, impacting risk assets, including digital currencies.
Analysts led by Gautam Chughati said: "In the short term, Bitcoin and digital currency markets are linked to risk assets, particularly over the weekends, as digital currencies are the only measure of risk. Thus, sell-offs of cryptocurrencies are not surprising."
Despite the short-term correlation with risk assets, analysts support that Bitcoin has a long-term compounded history showing its relative value, especially with governments accumulating more debt and deficits, leading to a decrease in cash value.
However, they point out that there is no evidence that Bitcoin is uncorrelated with the market in the short term unless there is a flight to safety from fiat currencies.
Looking ahead, Bernstein expects Bitcoin to trade based on its own fundamentals after absorbing the initial shock of risk.
The investment bank indicates that Bitcoin has consistently maintained support in the $90,000 range after recent sell-offs, supported by strong institutional demand.
In January 2025, Bitcoin exchange-traded funds recorded a net inflow of $5.3 billion, in line with annual expectations of around $70 billion in inflows.
At the same time, MicroStrategy continued its Bitcoin acquisition strategy, purchasing approximately $2.5 billion worth of Bitcoin and issuing $584 million in perpetual preferred stock, which is likely to be used for further Bitcoin purchases.
With the efforts of the U.S. government to establish a national Bitcoin reserve and the expected support from banks following the repeal of SAB 121, Bernstein expects continued inflows into Bitcoin from ETFs and corporations.
Furthermore, the Trump administration sees digital currencies playing a strategic role. While the market remains skeptical about Elon Musk's initiatives regarding DOGE, the administration aims to control inflation through various measures, including increasing energy production.
Even if the fiscal deficit is reduced, the United States will still face a significant debt burden, maintaining Bitcoin's importance as a hedging tool. Furthermore, in response to tariffs, Bernstein analysts expect foreign governments to increase their gold reserves and potentially turn to hard assets like Bitcoin as stores against economic instability and geopolitical financial tensions.
They believe that the Trump administration's approach to Bitcoin as a reserve asset will lead other nation-states to adopt Bitcoin in a similar manner.
