Investing.com -- Bitcoin and other big cryptocurrencies dropped sharply on Monday, as renewed trade tensions following US President Donald Trump’s latest tariffs on China, Canada, and Mexico triggered a broader market downturn.

The world's largest cryptocurrency fell nearly 4% to $96,038.0 as of 04:32 ET (09:32 GMT).

Bitcoin’s decline may seem unexpected to some, as higher inflation is often viewed as a positive for the 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, weighing on risk assets, including cryptocurrencies.

“In the short term, Bitcoin & crypto markets correlate with risk assets and particularly during weekends, crypto is the only barometer of risk. Thus, crypto sell-off is not surprising,” analysts led by Gautam Chhugani explained.

Despite the short-term correlation with risk assets, analysts uphold that Bitcoin has a long-term compounding history that showcases its relative value, especially as governments accumulate more debt and deficits, leading to monetary debasement.

Still, they note that there is no evidence of Bitcoin being 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 the initial risk-on shock is absorbed.

The investment bank points out that Bitcoin has consistently held support in the high $90K range after recent sell-offs, bolstered by strong institutional demand.

In January 2025, Bitcoin ETFs recorded a net inflow purchase of $5.3 billion, aligning with the annual forecast of approximately $70 billion in inflows.

Meanwhile, MicroStrategy continued its Bitcoin acquisition strategy, purchasing around $2.5 billion worth of Bitcoin and issuing $584 million in perpetual preference shares, which are likely to be used for further Bitcoin purchases.

With the US government's efforts to establish a Bitcoin national reserve and the expected support from banks following the repeal of SAB 121, Bernstein expects persistent ETF and corporate flows into Bitcoin.

Moreover, the Trump administration views cryptocurrencies as playing a strategic role. While the market remains skeptical about the impact of Elon Musk's DOGE initiatives, the administration aims to control inflation through various measures, including increased energy production.

Even if the fiscal deficit is reduced, the US will still face a substantial debt burden, maintaining Bitcoin's relevance as a hedge. Furthermore, in response to tariffs, Bernstein analysts expect foreign governments to increase their gold reserves and potentially turn to hard assets like Bitcoin as buffers against economic instability and geopolitical financial tensions.

They believe that the Trump administration's move towards Bitcoin as a reserve asset will lead to similar adoption by other nation-states.