Bitcoin's Diminishing Role as a Hedge in Financial Markets

Once regarded as a safeguard against economic uncertainty, Bitcoin (BTC) is now finding it challenging to uphold this title in the face of shifting global economic conditions. The cryptocurrency's market performance is increasingly paralleling that of traditional risk assets.

Since Donald Trump's inauguration on January 20, the crypto market has experienced a staggering decline, wiping out almost $1 trillion in value.

Bitcoin's Evolving Role in Financial Markets

Traditionally, Bitcoin has been viewed as a hedge, often moving alongside gold during turbulent times. However, this pattern has reversed following the onset of Trump's presidency. While gold has continued to rise, Bitcoin has faced significant corrections, indicating a change in market perception.

“Since Trump took office on January 20, the market has dropped from $3.7 trillion to $2.5 trillion. It’s peculiar since his administration is perceived as highly pro-crypto,” observed crypto analyst Symbiote.

A critical factor influencing this shift has been Bitcoin's increasing correlation with traditional financial instruments. In 2024, Bitcoin has moved in sync with the Nasdaq 100 and S&P 500 about 88% of the time, a stark contrast to its previous role as a negatively correlated asset.

This correlation has since dropped to around 40%, indicating that Bitcoin is now behaving more like a high-risk technology stock rather than a hedge against inflation or economic upheaval.

Another significant concern is liquidity in the market. Since 2020, financial markets have been reacting to reduced liquidity, which has had a detrimental impact on the crypto landscape. Observers note that liquidity is flowing back into the US dollar, historically the safest asset during trade conflicts.

This transition has led to a series of flash crashes in the crypto market, contributing to an increase in volatility and investor apprehension. Data from Coinglass shows that Bitcoin ETF (Exchange-Traded Funds) assets under management fell from $120 billion to $100 billion in just a matter of weeks.

Furthermore, the decentralized finance (DeFi) sector is also experiencing challenges. According to DefiLlama, the total value locked (TVL) in DeFi has plummeted from a peak of $128.7 billion in 2025 to $93.2 billion at the time of writing, reflecting a significant decrease in faith in crypto's ability to provide stability in uncertain economic climates.

Impact of Trade War Fears on Crypto Sentiment

A survey conducted by Bank of America revealed rising concerns about global trade wars. Notably, 42% of participants identified this as the most negative factor for risk assets in 2025, increasing from 30% in January.

“When asked which global development would be perceived as the most bearish for risk assets in 2025, 42% cited a global trade war, predominantly due to the new Trump administration's tariff threats,” reported Pensions & Investments.

Remarkably, only 3% believe Bitcoin would excel in a full-scale trade war, in contrast to gold and the US dollar. This indicates a profound shift in perception—markets are increasingly viewing Bitcoin as too volatile to serve as an effective hedge during financial crises.