Chart of the Week | Bitcoin vs Trade Balances

Good morning everyone and welcome to our Chart of the Week series! Every week we provide you with one of the most informative Bitcoin charts, sent directly to your inbox.

This week we dive into the topic of tariffs and how trade surpluses and deficits can impact Bitcoin’s price.

Let’s dive in!

In the contemporary global trade picture, there are generally two main categories: countries that run trade deficits, and those that run trade surpluses.

A country running a trade surplus exports more than they import (their country’s ‘income’ from their exports exceeds the ‘costs’ they pay for imports). Conversely, a country running a trade deficit (like the United States), imports more than they export.

Countries running a trade deficit, must come up with the money to pay the rest of the world for their goods. In the United States, this is done partially, through an ever-expanding fiscal deficit (i.e. government spending vs. government revenue - see chart below).

Accumulation of Wealth

Under a gold-standard, countries running trade surpluses would accumulate more and more gold, leading to a stronger economic position and stronger currency. This principle applies to individuals too: only those who produce more value than they consume can accumulate bitcoin and are, generally speaking, in a stronger financial position than those who are net consumers.

The same general principle applied to countries under a gold standard, but since the advent of fiat currency (and the Dollar as global reserve currency), this all got a bit wonky.

With the dollar becoming the world’s reserve currency and so much global trade and commerce denominated in dollars, there is an artificial bid under the dollar. This is what has led to the dollar becoming stronger and stronger, even as their trade and fiscal deficits continue to worsen. This is typically very good for the dollar and subsequent dollar-denominated assets (see below the performance of the S&P 500 relative to to the inverted balance of trade).

Tariffs

Put very simply, tariffs are designed to counteract the various forces that are leading to a trade deficit between two counties. If the United States imports far more than they export with China because Chinese goods are much cheaper, the United States may place an additional ‘cost’ on imports into the United States from China. This helps to incentivize domestic corporations to produce those goods within America.

Tariffs cause a strengthening in the denominating currency of the country imposing the tariffs. This is why the dollar has been strengthening since the election of Donald Trump.

The below overview covers recent examples examining Donald Trump’s first term in office and his subsequent enforcement of tariffs back in 2018.

Implications for Bitcoin

In a world of escalating trade tensions, deglobalization, and countries placing an emphasis on protecting their domestic economies, the world has shifted toward favoring assets that are neutral and float freely in all currencies (without the centralization and trust of any one country).

This is partly why we have seen such a dramatic rise in the price of gold over the past several months. It is worth noting, bitcoin is objectively better than gold in most, if not all, of the individual properties that gold possesses.

Implications for Fiat

As mentioned before, the country imposing tariffs usually sees a strengthening of their currency. This offsets most, if not all, of the inflationary impact on the citizens of the imposing country. If the United States imposes a tariff of 10% on Chinese goods, but the Yuan weakens against the dollar by 10%, there is effectively no ‘real’ price change.

This being said, as a country’s currency strengthens against others, it encourages imports rather than exports. A strong dollar is very good for keeping the cost of imports low, but if your goal was to reindustrialize your economy and make your exports competitive in the global economy, you would actually want a weaker currency.

However, the dollar’s reserve currency status puts a persistent passive bid under the dollar, preventing this weakening. In fact, if the country tries to implement tariffs, this would cause the dollar to strengthen even further. This is otherwise known as “Triffin’s Dilemma” and is the direct result of being the reserve currency issuer.

The only seeming way out of this dilemma, is a move away from the dollar as the global reserve currency and towards a neutral asset that freely floats in all currencies. Two main assets come to mind: gold, and bitcoin.

Summary

Put simply, tariffs are a band aid solution for the intractable position that the United States finds itself in. Surely, tariffs could be one of the first solutions a country with a huge trade deficit may attempt, but it will only lead to a strengthening of that nation’s currency, which makes exports even less competitive.

Likewise, the fact that the dollar is the reserve currency issuer is fundamentally incompatible with balancing trade, since the reserve currency stratus prevents the dollar from weakening enough.

The only way out for the United States, which could effectively solve all of these contradictions, is a move away from the dollar as the global reserve currency.

Scott Bessent, the Treasury Secretary, mentioned such a “global monetary reordering” multiple times in a 2024 speech at the Manhattan Institute. We also know this is the most pro-bitcoin administration in history, so the likelihood of successfully implementing such a move becomes easier to imagine.

The consequences of such a move would be absolutely monumental, and re-shape global history. These are the sorts of events that only happen once in a lifetime and, in this way, bitcoin offers a massively asymmetrical risk to reward.

Hopefully that got you even more fired up about Bitcoin’s long run potential - Tthat’s it from us this week, remember to stay humble and stack sats!