Stagflation is a concern for investors worldwide. In addition, the rising cost of living and slow economic growth are causing negative sentiment. Stagflation tends to negatively impact the stock market, but many investors wonder how it affects the cryptocurrency market.
What is stagflation?
Stagflation is a state of the economy in which activity slows down, and prices rise. The term was formed from two words: stagnation and inflation.
Stagflation is characterized by:
- rising inflation;
- a slowdown in economic growth;
- growing unemployment.
Source: First Citizens Bank. Stagflation model
This unfavorable combination raises concerns: efforts to reduce inflation increase unemployment, and lower unemployment increases inflation. In simple terms, inflation is a prolonged rise in the prices of goods and services, but it can also be described as a continuing decline in the purchasing power of money.
What does it mean for crypto?
Although the IMF discourages crypto adoption, it agrees that it could be useful in collapsing financial systems. In such countries, cryptocurrency could be used to improve the existing financial system. For example, following Russia's invasion of Ukraine and its subsequent financial crisis, many Ukrainians turned to cryptocurrency as a way of preserving their wealth.
Investors will increasingly see Bitcoin as a viable way to store and hold value, as other assets may become risky over time. Currency depreciation caused by money printing has driven investors to seek more stable investments.
As the economy suffers from inflation and unemployment, investors may turn bearish on the market. Marginal profits decline over time and the cost of capital rises. As a result, growth stocks may turn away from investing in capital-intensive businesses. During a bear market, investors may seek a safe haven to store and protect their assets.
Although Bitcoin has not yet decoupled from tech stocks, there is a good chance that further bearish momentum will cause decoupling. Bitcoin.com reported on May 22, 202,2 that the number of bitcoins being held on exchanges has been dropping, reaching lows not seen since 2020.
As the supply of Bitcoin on the exchanges continues to shrink, the low liquidity could make the Bitcoin price more volatile. The decoupling from tech stocks may indicate that widespread adoption of Bitcoin is accelerating and stagflation may be a fundamental factor driving power behind it.