What is stagflation, and how could it impact the cryptocurrency markets?
Cryptocurrencies have not been around for very long. Hence, there is not much data yet on whether cryptocurrency is a good investment during stagflation and if stagflation is generally good or bad for the markets.
To grasp if cryptocurrency investments work well during stagflation, one can examine how traditional markets behave during inflation or stagflation and why. Stagflation is naturally bad for traditional markets, and as cryptocurrency markets have a high correlation with general indexes, meaning that negative sentiment can trickle into cryptocurrencies which are digital assets managed with cryptographic algorithms.
In general, investors who have their money in traditional instruments may be more willing to ride out periods of economic uncertainty than those who invest in cryptocurrencies that go along with higher volatility. During stagflation, there thus may be less demand for cryptocurrencies than usual.
Stagflation may also hurt cryptocurrency markets because it makes retail investors less interested in buying digital assets. After all, high inflation directly impacts how much money people have to purchase cryptocurrency, which is considered a more risky investment.
Yet, depending on one’s cryptocurrency investing strategy, one may choose to invest in these assets over traditional financial instruments. Cryptocurrencies run on a blockchain and are not tied to any particular country’s monetary policy like fiat currencies are. When inflation rises in one country but not another, investors can still capitalize on gains realized through cryptocurrency investments, even if their home currency loses value due to inflationary pressures.
Investors will often look for a way to protect their wealth from stagflation, especially in countries like Venezuela or Argentina, where hyperinflation occurs. Hyperinflation is when there is a speedy and uncontrollable price increase of vital goods and services in an economy. Here cryptocurrency investments work well during stagflation as they provide an alternative payment means and protect against hyperinflation. Individuals may choose to flee hyperinflation by re-directing some of their reserves into Bitcoin (BTC).