Ongoing supply chain problems and the war in Ukraine have caused panic in commodity markets. The prices of fossil fuels, industrial metals and agricultural commodities are reaching unprecedented levels. The consequence: everything becomes more expensive. The baker’s bun is not only more expensive due to the sharp rise in electricity prices, but also because the price of wheat is simply skyrocketing.
At the same time, employees and unions are putting pressure on wages, for understandable reasons. The momentum of the feared spiral of wages and prices could take full effect in the coming weeks. Average inflation of 5.8 percent in the euro zone could soon catch up with EU leaders Lithuania, Latvia and the Czech Republic. The control of the purchase price already exceeds 10 percent.
If growth does not materialize, the specter of stagflation would threaten our prosperity. Then it would no longer be possible to adequately offset rising inflation through growth. Most investors are losing money, so they are simply getting poorer. Most public companies lose value during periods of stagflation. But what about cryptocurrencies, especially Bitcoin, in a stagflation?
Stagflation: experience values for Bitcoin equal to zero
No one is able to predict the rate of inflation. Neither the European Central Bank nor investment banks nor financial analysts on YouTube. However, the probability of certain scenarios is increasing. One such scenario is the much-discussed stagflation. The difficulty: For as long as the crypto asset class has existed, there has been no stagflation in major industrialized nations. Therefore, there is a lack of empirical values for the asset class, which is difficult to assess anyway.
Consequently, it may make sense to target the reaction of technology or risky assets. After all, these have shown the highest correlation with cryptocurrencies to date. Like the growth stocks of an ARK Innovation ETF, most cryptocurrencies are down 50 percent or more since their correction began in November of last year.
The big problem of inflation
In isolation, higher inflation is not inherently bad for tech stocks or bitcoin. However, as inflation rises, so does the likelihood of an interest rate hike by central banks. The result is less accommodative monetary policy, which in turn is very bad for Bitcoin and tech stocks and good for US dollars and government bonds. As a result of the US central bank’s change of course, the innovation stocks mentioned above are therefore under a lot of pressure. Eventually, the cost of financing growth rises and the opportunity cost rises.
If the corresponding growth does not materialize, ie inflation turns into stagflation, then the current development could even intensify. So, historically, gold and commodities are the only assets that have experienced significant stagflation in the past (see chart above). It was followed by the real estate sector, which was also able to rise, while stocks lost value on average. Applying this logic to cryptocurrencies does not look good for the asset class during stagflation.
Bitcoin has no digital gold at the moment
However, there is still hope. Until now, the market has not bought into the narrative that Bitcoin is the new digital gold. While some crypto wealth managers may write that in their promotional brochures, and even bitcoin devotees may 100 percent support the digital gold narrative, the reality is different. When there was a panic in the market, as is currently the case with the Ukraine war, gold and not Bitcoin was the asset of the moment. In the past, Bitcoin was neither convincing as a short-term hedge against inflation nor as a safe haven.
The possibility that Bitcoin will be perceived differently by investors in the future, or that its correlation with risky assets will change and it will also effectively become digital gold, could have a positive effect on the number 1 cryptocurrency. Unfortunately, the The conclusion that the digital gas of the Ethereum blockchain also correlates with the price of physical gas is far too exaggerated. Finally, there is a supply shock to physical sources of energy. On the other hand, the Ukraine war has had no effect on the supply of Ether and Co. Altcoins are more likely to be valued by the market as startups or young growth companies and therefore come under pressure from the stagflation.
Growth despite stagflation
The fact that there is no growth and inflation is high does not mean that all companies or all cryptocurrencies have to lose value. Rather, such phases should be understood as trend statements. It should mean that you can make a lot of money with stocks on the long side. Unlike in recent years, you have to trust the right candidates. Stock selection rather than ETF acquisition would be the bottom line.
Even in the most difficult phases of the market, there are companies that can increase profits and expand market share. So there can also be growth in stagflation, but then it is more likely to be found at the individual or micro level than at the macro level. But what does this logic mean for the cryptocurrency market?
Crypto Market: Is the Great Decoupling Coming Now?
The biggest opportunity for the crypto market is that so-called mainstream adoption will increase to such an extent that the negative market environment will be overcompensated. The cryptocurrency sector would then decouple from technology and growth stocks. One look at the S&P 500 would no longer be enough to tell if the signals in the crypto market are green or red.
A decoupling through growth in a phase of stagnation would certainly be a desirable scenario as it would signify massive strength and undervaluation relative to other asset classes. However, the recent past of the cryptocurrency industry has shown that it is possible to make extreme jumps in a very short time. In particular, if the biggest headwind for crypto prices, namely regulation, were to turn positive, this could mean capital inflows that would overshadow a weak market environment.
Conclusion on stagflation and bitcoin
The well-known stagflation from 1972 to 1982 inclusive in the industrialized countries dates back to an oil price crisis. We haven’t been this close to an energy crisis in 40 years. The fear of stagflation and economic recession therefore seems logical in view of the rate of inflation and the sharp rise in oil and gas prices. After all, every oil price increase in the past 50 years of more than 50 percent has led to a subsequent recession in a short period of time (see chart below). However, the stable unemployment rate and the strong state of business so far continue to argue against stagflation.
In the short term, negative effects on Bitcoin and the crypto market may prevail. It is not to be expected that Bitcoin will continue to be perceived by the market as digital gold. Except Russian oligarchs with money flight instinct. A further escalation of the Ukraine war and a possible oil embargo could push financial markets further lower. Trading now means dealing with maximum volatility in both directions.
Therefore, such factors of real economic influence could also have an impact on the financial sector for the time being and prevent rallies. From a fundamental point of view, the war in Ukraine and the threat of stagflation have not changed the prospects of Bitcoin and Co. So, if you are convinced of the success of the mentioned assets, you can use said market phases to buy more.
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