Stocks Rally on Trump's Tariff U-Turn, But Crypto Bubble Remains Under Pressure

On January 21, markets experienced a dramatic about-face that reveals deeper structural fragilities beneath the surface. As European investors were still reeling from tariff threats and capital flight, Trump announced the cancellation of duties on eight European nations, claiming a “framework” had been reached on Greenland. Wall Street erupted in relief: the Dow surged 1.21% to 49,077, the S&P 500 rose 1.16% to 6,875, and the Nasdaq gained 1.18% to 23,224. Yet while traditional equities rebounded sharply, the cryptocurrency sector’s muted response signals a troubling disconnect—one that highlights the crypto bubble’s vulnerability when risk sentiment shifts.

The TACO Effect: When Policy Whiplash Exposes Market Fragility

This was a textbook “TACO” (Trump Announcement Causes Overreaction) event. Just 24 hours prior, Trump had threatened to slap 10% tariffs on Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland. Panic rippled through global markets. The EU prepared €93 billion in retaliatory measures, Danish pension funds announced plans to dump U.S. Treasuries, and capital scrambled out of dollar assets. The S&P 500 plunged 2.06%—its worst drop since October last year.

Then came the reversal. Ahead of Davos, Trump softened his stance dramatically, withdrawing tariff threats while maintaining that “Greenland is vital to U.S. national security” would be resolved through negotiated frameworks rather than military posturing. Goldman Sachs strategists quickly reinterpreted the narrative: “Markets underestimated Trump’s negotiating flexibility. The tariff threats were more about leverage than policy.” Translation: sell the fear, buy the dip. Yet this hairpin turn itself is the warning. Policy-driven volatility of this magnitude exposes how thinly anchored current market valuations truly are.

Risk Assets Rally—But Crypto Lags Behind

The equity rebound was led by the sectors hardest hit during the panic: semiconductor stocks surged as geopolitical risk subsided. Nvidia climbed nearly 3%, reclaiming most of its 4% loss from the previous session. The Magnificent Seven Tech Index rose 0.98%, Tesla advanced nearly 3%, and Google gained close to 2%. Amgen led the Dow with a near-4% gain. Even Chinese ADRs participated, with names like Baidu rallying over 8%.

But here’s where the crypto bubble’s structural weakness becomes apparent. While equities bounced decisively, Bitcoin edged up only slightly, stuck in the $87,900–$90,000 range—and the latest data (as of January 26) shows BTC at $87.92K, down 0.86% over 24 hours. Ethereum and Solana followed a similar pattern, with ETH at $2.90K (-1.66% daily) and SOL at $122.45 (-3.55% daily). Trading volume remained thin across the board. This “down more, up less” dynamic directly contradicts the narrative that crypto serves as “digital gold” or a reliable hedge against equity volatility.

The Liquidation Cycle and Institutional Caution

Coinglass data reveals $630 million in total liquidations across crypto perpetual contracts within 24 hours, affecting 140,000 traders. While below the prior day’s levels, persistent unwinding of leveraged positions indicates institutional players remain defensive. More telling: BlackRock’s IBIT and Grayscale’s GBTC saw significant outflows even as equities rallied, signaling that institutional allocators are reducing rather than rotating into crypto exposure.

This pattern reflects a fundamental asymmetry. During equity sell-offs driven by geopolitical fears, crypto falls because traders deleverage across the board and risk-off sentiment is indiscriminate. During equity recoveries on de-escalation, crypto fails to participate meaningfully because institutional demand remains subdued—traders are closing leveraged positions, not adding them. The crypto bubble thus reveals its true nature: not an alternative asset class, but a highly correlated, levered bet on risk appetite that offers neither alpha nor diversification.

Gold’s Spike Holds, Bonds Wobble Globally

Gold briefly broke above $4,800 during peak safe-haven demand, only to retreat to around $4,650 as Trump’s tariff reversal dampened hedging flows. Yet the underlying trend remains solid. Aakash Doshi, Head of Gold Strategy at State Street Global Advisors, noted that despite intraday volatility exceeding $150, “the overall trend remains intact. A break above $5,000 per ounce by 2026 is no longer implausible.” Central bank demand continues to anchor prices—Poland’s central bank just approved purchases of 150 tons of gold, raising total reserves to 700 tons. After last year’s 67% surge and this year’s additional 6% gain through mid-January, the structural case for gold remains intact.

Bond markets, by contrast, sent murkier signals. The 10-year Treasury yield dipped marginally to 4.28% but remains within the elevated range seen since September 2025. More concerning: Japan’s 10-year JGB yield fell five basis points to 2.32%, but only after briefly piercing 4% on the 40-year maturity—a technical level once considered unthinkable. Japanese Finance Minister Shunichi Kawamura urged calm, but markets remain skeptical. The temporary stabilization appears to be short-covering rather than a fundamental reset. Meanwhile, Danish pension fund AkademikerPension did not reverse its decision to exit U.S. Treasuries entirely by month-end, suggesting European institutional skepticism toward dollar creditworthiness has shifted from emotional reaction to structural repositioning.

The Crypto Bubble’s Underlying Fragility

What the January 21 reversal truly exposed is not Trump’s unpredictability but the fragility of a globally interconnected system operating under sustained policy uncertainty and deteriorating fiscal positions. The crypto bubble fits squarely into this picture.

Asset prices across crypto have inflated dramatically in anticipation of favorable regulatory and monetary conditions. Yet beneath that optimism lurks a dangerous dependency: the entire ecosystem remains highly sensitive to leverage cycles, institutional sentiment shifts, and macro policy reversals—exactly the type of volatility we witnessed in a single day. When volatility is triggered, leveraged players force selling, and the absence of stabilizing institutional demand becomes apparent.

The fundamental issue is that the crypto bubble lacks the cash-flow or dividend support that might justify valuations during periods of risk-off sentiment. When equities decline, investors at least own productive assets or can anchor valuations to future earnings. Crypto offers neither. It is purely a momentum and sentiment play—and momentum can reverse on a dime, as January 21 demonstrated.

The Road Ahead: Structural Risks Loom

The coming weeks will test whether January 21’s rebound holds or whether deeper fault lines will resurface. Fed rate cut expectations have already cratered—futures now price in just 47 basis points of easing for all of 2026, down from 53 bps at year-end. Most economists expect rates to remain steady through Q1, with potential cuts delayed until after Powell’s term ends in May.

Trump’s upcoming Davos speech will be closely monitored. If Greenland tensions reignite or Japanese bond volatility resurfaces, global long-duration debt could face fresh turmoil. But the more structural concern is this: America’s widening fiscal deficit, Europe’s growing skepticism toward dollar credibility, and a fragile global debt bubble straining under prolonged high interest rates—these are not resolved by tariff announcements.

The crypto market’s muted response to last week’s equity rally is not a minor technical quirk. It is a visible symptom of a larger malaise: the crypto bubble is increasingly detached from fundamental demand, increasingly dependent on leverage and sentiment, and increasingly vulnerable when policy surprises puncture risk appetite. When the next TACO arrives—and it will—the crypto sector’s ability to hold ground will be severely tested. For investors holding crypto, the January 21 reversal should serve as a sobering reminder: bubbles do not typically deflate gently, and fragility often hides beneath a single day’s euphoria.