Economic slump: impact on cryptocurrencies

Current events are worrying, to put it mildly – besides a pandemic, World War III hangs over humanity like a sword of Damocles. Shortages and rising prices of raw materials, climate change and rising energy prices add to the uncertainty. What this could mean for cryptocurrencies is explained here.

Stagflation looms

The crisis reports didn’t want to diminish for weeks. First, there is the continuing global inflationary pressure as a result of expansionary monetary policy and supply chain problems. Then there is the intensification of inflationary tendencies due to the conflict between Russia and Ukraine, which has serious consequences due to the associated Western sanctions against Russia, a globally important supplier of raw materials. Then there is the icing on the cake, so to speak, the hard lockdown imposed by China in Shenzhen. Everything is actually set for global stagflation after the end of the sanctions.

Stagflation is the coincidence of economic stagnation and inflation. The current situation is reminiscent of the situation almost 50 years ago when the term stagflation was invented as a result of the 1973 oil crisis. The ingredients are also the same: a military conflict, triggered by an oil supply shock, which in turn will keep energy prices high for a long time. A price increase chain reaction starts, the high prices are passed on by companies to their customers. If they cannot keep up with inflation due to a lack of rising wage levels, the consequence is a decline in mass purchasing power and the vicious circle of stagflation picks up speed: Fewer products are bought, fewer jobs are created.

Investing in times of stagflation

The stagflation of the 1970s led to a bear market for shares that lasted for years. In addition, there is a reduced risk appetite in times of crisis. Does this also apply to cryptocurrencies? Bitcoin is revered as “digital gold” and rejoices in rising prices. The reason for the gold allegory is the fact that Bitcoin, like gold, has a supply limit – to a maximum of 21 million BTC. The question among analysts thus arises, quite understandably, whether Bitcoin can do today what gold managed to do in the 1970s: To act as an effective inflation hedge. Opinions on this currently differ – in addition to price forecasts of 100k, there are critical voices that fear a complete crash.

Uncertain investors should pay attention to the chance that cryptocurrencies could decouple from the stock market in the medium to long term. So far, the crypto sector has largely followed the trend of high-growth tech stocks, which was very visible in recent months: the weak months of May and June 2021 were followed by a rise in cryptos and the NASDAQ 100 until the end of November, before there were significant losses in both tech stocks and BTC. Crypto fans hope that cryptocurrencies can break free from the influence of growth stocks in the future and that the crypto sector can deliver positive returns even in a stagflationary environment. Thus, bitcoin could even continue to grow and further benefit from investors mixing BTC into their portfolios out of inflation concerns, which could even allow bitcoin to benefit from stagflation!

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