Recently, an Internal Chinese State Report was released, prepared by a think tank long associated with China’s Intelligence Agency (Ministry of State Security or MSS for Short) which hinted at the possibility of conflict with the United States.

It concluded that anti-Chinese sentiment was at its highest since the Tiananmen Square Massacre. Back then, international powers sanctioned China and the Chinese state was isolated. Since then, China has emerged and grown into the world’s second largest economy.

A source with knowledge of the letter compared it to the Novikov telegram. Novikov was the Soviet Ambassador to the United States during the immediate post-war period. In 1946, he dispatched a message to Soviet Foreign Minister Molotov warning of America’s foreign policy, presaging the decades-long Cold War between the Soviet Union and the United States of America.

There are signs of a coming economic decoupling everywhere you look and a potential cold war.

China is doubling down on censoring criticism of its handling of the COVID-19 pandemic. It has reportedly detained the maintainers of Terminus2049, an independent online repository that hosted censored news articles about the COVID-19 outbreak.

Local authorities are now using the police to threaten the relatives of the victims of the COVID-19 pandemic in Wuhan who want to sue the government.

Meanwhile, tensions have risen as Countries and Organisations such as Sweden, the United States, the European Commission and Australia have asked for an independent investigation into the origins of the pandemic while China has pushed back.

How might Bitcoin and other cryptocurrencies fare in a US-China trade war that worsens? There are some notable downsides. It’s possible that faced with a larger break in economic ties, China might impose stricter capital controls on its population and redouble efforts on its own central bank digital currency, trying to cut off China and its citizens from the broader cryptocurrency ecosystem.

It’s also possible that Bitcoin will suffer short-term price decreases, since it has taken on more of a speculative position given institutional investor interest.

Yet, there are some surprising ways Bitcoin and cryptocurrencies might actually see an upside with a US-China cold war.

The first notable one is that it is likely existing fiat and capital gateways between the largest and second largest economies would become significantly disrupted.

Already, in Hong Kong, credible fears have arisen that with the coming “economic storm”, that the “One Country, Two Systems” framework that helped Hong Kong form a credible capital bridge between China and the rest of the world might be in the process of being abandoned.

China’s economy still has a large export-driven component to it, though it has receded from a 2008 peak of about 36% of GDP, at 20% of GDP, exports still represent a significant chunk. Those businesses and exporters are not all suddenly going to be able to shift from the extra margins export gives them without significant economic pain.

There will be a need for cross-border capital flows as existing capital bridges decay, something cryptocurrencies might play a role in.

After all, cryptocurrencies trade at a premium on Asian exchanges, and has a slightly inverse correlation with the Chinese Yuan.

Secondly, as both parties start retrenching towards spheres of economic influence, with China likely gravitating towards Southeast Asia, Africa and Belt and Road countries and the United States trying to patch up relationships with its North American, South American and European counterparts, both spheres are going to suffer from less economic growth because they will not be able to take advantage of comparative advantage and free trade across the board.

This is likely going to be a deliberate choice when it comes to certain industries: for example, you might want to keep medical supplies and their manufacturing strictly within the bounds of your closest political sphere of influence.

Yet the effect of this in aggregate will be a likely global decrease in growth rate right as economies are struggling out of the gate thanks to the effect of COVID-19 lockdowns.

The Great Depression was worsened and extended by the effect of tariffs and economic tension between different partners, as well as tightening monetary policy. It is a lesson writ large for those that manage the monetary system, one of the only analogues central bankers are going to find for the current situation and one they go to readily (Ben Bernanke, for example, was noted for calling upon his research into the Great Depression to guide choices he made in the 2008-2009 Great Recession).

What this will mean in the short-to-medium term and perhaps over a longer time horizon if economic growth doesn’t pick up is that there is going to be loose monetary policy, which should have inflationary effects as the monetary base increases to try to stimulate growth.

This will help support investment assets like cryptocurrencies for institutional investors and help advance a very stark contrast between the deflationary economics of cryptocurrencies and inflationary policies of monetary authorities. Billionaire investor Paul Tudor Jones made this argument as he was loading up on Bitcoin, saying that the cryptocurrency reminded him “of the role gold played in the 1970s [as an inflationary hedge].”

Finally, as more and more business and services are forced to move online due to multiple lockdowns, the potential for digital means of exchange to power larger parts of the economy will remain quite large.

With tension between China and the United States, a global standard for digital currency from a central bank will succumb to competition between two different standard-bearers who are quickly becoming fierce geopolitical rivals.

This may help accelerate cryptocurrencies as consumers look towards a truly global cross-border payments system.

A potential worsening of the US-China trade war and subsequent cold war would have many unforeseen consequences. Yet, packed within the effects are both some downside risks for cryptocurrencies and Bitcoin as well as some surprising and strong upside factors.

Author: Roger Huang, was one of the first writers in 2014 to write about the intersection of blockchain in remittance payments and drug policy with VentureBeat and TechCrunch. Since then, I’ve been an early long-term HODLer of Ethereum, and I’ve built several mini-projects with blockchain for fun. I’d like to learn as much as possible about our decentralized future while sharing that knowledge with you.
Editor’s Note: The article reflects the author’s opinion only, and not necessarily the views of the editorial opinion of Belt & Road News.