Cryptocurrencies have been around for a relatively short while so there is no adequate data to prove whether they are a good asset class during stagflation or not. However, since the crypto market is already correlating with traditional markets, especially after ETF approvals, one can study the response of traditional markets during the past stagflation for context.

Stagflation is bad for traditional markets and the effects may reflect on crypto markets. This negative sentiment has implications for holders and acquirers of crypto assets. For holders, they may be willing to cash out their crypto assets because of the economic uncertainty and the high volatility of crypto assets. This will lead to less demand for cryptos and possible market instability.

Digital asset acquirers also may be less likely to acquire more assets because of stagflation. This is because prolonged high inflation directly affects the amount of cash people have to invest or buy crypto. Because cryptos are highly risky investments, there is even more likelihood that acquirers will stay away from them.

Crypto markets may be favorable in some cases though, especially if the bad economic situation happening in one nation does not get to another. Since cryptocurrencies run on decentralized blockchains not controlled by a specific country’s economic policies, they can help people escape their country’s economic problems. Investors can use blockchain to capitalize on the general crypto market gains even amidst stagflationary pressures in their home countries.

Finally, regardless of the economic situation, savvy investors will always find a way of profiting during any market condition. This is why crypto enthusiasts should be well-equipped with the best market research methods and learn to remove emotions while investing in or trading digital assets.

What Stagflation Means for Cryptos

Since stagflation happens alongside severe economic downturns and high inflation, some analysts have suggested that Bitcoin and other cryptocurrencies may serve as possible hedges during such situations. Although the risk with hedging using cryptos is high, we can analyse this possibility by exploring three crypto assets that may be used:

Bitcoin

Source: Bitbo.io — Bitcoin Price Temperature (BPT) showing BTC’s current position in the market

Gold has been used for hedging against inflation for a very long time and Bitcoin may also thread in a similar path. Because Bitcoin is now called the “digital gold,” and is a decentralized payment method beyond central control, it is unaffected by economic policies or corruption. Furthermore, Bitcoin is a scarce asset with a finite supply, consolidating its status as a real store of value. Because of its many properties that resemble gold, investors may consider Bitcoin as they aim to preserve their purchasing power during stagflation.

As the world gets more receptive toward Bitcoin, the cryptocurrency is continuously gaining ground as a reliable investment vehicle. If Bitcoin can break its correlation with the traditional market, it will consolidate better and will not be affected by traditional market conditions. In response, the awareness and injection of money into Bitcoin will increase, leading to a more stable currency that can be a safe store of money during any economic uncertainty.

Ethereum

Because Ethereum has a very close correlation with Bitcoin and has been consistently trailing it in global cryptocurrency charts, Ethereum is also noticeable in this conversation. Although Ethereum may not catch up with Bitcoin anytime soon in terms of value, ETH has a clear leadership and a unique utility, claiming a spot as the “decentralized world’s computer.” Before considering Ethereum as a hedge against stagflation, it is important to note that it has a higher beta (higher percentage highs and lower percentage lows) than Bitcoin and you should conduct a risk assessment before investing.

Other Altcoins

Compared to Bitcoin and Ethereum, other altcoins have a lot higher beta and investors should take significant caution before hedging with them. During bear markets, which are likely during stagflation, altcoins may dip lower than imaginable, making them too risky. Therefore, always endeavor to inspect altcoins closely and consider their long-term utility, use cases, profitability, and community following before taking any steps.

Conclusion

Although the world is not experiencing stagflation at the moment, unfolding events suggest great caution. The World Bank in its June 2022 global economic forecast, warned that the risk of stagflation has increased because of a steep slowdown of global economic activities and a surge in the inflation rate. Furthermore, the United States Federal Reserve and the Bank of England have sounded warnings that recession is looming due to the persistent inflation occurring in the United States and the United Kingdom respectively. Many other countries all over the world are also experiencing different levels of economic decline.

We are currently living in a decade where the world is rightly concerned about stagflation breaking out. As the whole world is taking active steps to guide against it, the crypto market is also involved in the mix. Since cryptos are closely correlated with traditional markets, an economic downturn may affect the crypto market. However, as Bitcoin is consolidating its role as digital gold, cryptocurrencies may become a haven for investors seeking to hedge against economic uncertainties.