How stagflation could lead to global bitcoin adoption

Stagflation can be defined as a prolonged period in which the economy is exposed to persistently high inflation, high unemployment rates, and stagnant aggregate demand. It is a period of zugzwang by central banks where monetary tools aimed at controlling rising inflation lead to high unemployment and lower economic output.

Inflation in the major world economies is currently at its highest levels in several years. For example, the United States reported an annual inflation rate of 8.5% in March 2022, while the Eurozone recorded an annual inflation rate of 7.4%.

In the UK, inflation in March 2022 was 7.0%. Rising energy costs have contributed significantly to high inflation in most major economies.

Since the start of the COVID-19 pandemic in March 2020, major global economies have been implementing easy money policies. To stimulate economic recovery, very low interest rates and massive asset purchase programs were implemented. In March 2020, the US cut interest rates to a range of 0.1-0.25 percent before starting to raise them last month to the current 0.50 percent. This rate is expected to rise by 1.0 percent at the next meeting scheduled for next week.

Over the past two years, the United States has printed more than $13 trillion in debt relief, infrastructure, and economic stimulus spending. This was done in three phases: in April 2020, December 2020, and March 2021. Since new money takes a few months, if not a year, to affect inflation figures, there is a possibility that money printed in 2021 will not be fully reflected in current inflation figures. This also applies to other major economies. They also printed money and kept interest rates at multi-year lows.

Inflationary pressures erode purchasing power, affecting household budgets as well as the value of savings. People spend a greater proportion of their income on interest payments as central banks rush to raise interest rates in order to control inflation. As a result, they have less income, which reduces aggregate demand in the economy.

When aggregate demand declines, firms’ sales revenue declines, which results in lower stock valuations. Further, with the rise in interest rates, people are encouraged to save more to take advantage of the interest payments.

This means that the first world countries are heading towards stagflation. As the US Federal Reserve, Bank of England, European Central Bank and other major central banks rush to raise interest rates to control inflation, loans will become expensive and stock markets will weaken.

Investors will increasingly think of Bitcoin

As a viable option to store and preserve value over time, as other assets may become risky over time. For starters, the devaluation caused by printing money is already driving people away from the US dollar, the euro, and other fiat currencies. People increase the supply of US dollars by trading fiat currencies for other assets that are believed to be rising, which leads to higher inflation.

With the entry of stagflation, the stock market may turn bearish as marginal profits deteriorate over time. As the cost of capital rises, growth stocks may refrain from investing in capital-intensive projects. During a bear market, investors may look for a safe haven to store and protect their assets. Despite the fact that Bitcoin has not yet broken away from tech stocks, there is a good chance that further downside momentum in these stocks will lead to a breakup.

The supply of Bitcoin held on exchanges is the strongest factor that increases the likelihood of Bitcoin detaching from stocks. According to a recent CoinDesk article, the amount of Bitcoin held on exchanges decreased by 18% in April 2022 compared to May 2020. As this balance continues to shrink, the decrease in Bitcoin’s liquidity could increase Bitcoin’s price volatility, leading to a decoupling. .

The decoupling from equities could indicate that widespread bitcoin adoption is accelerating, while stagflation may be the primary underlying factor driving bitcoin adoption.

Disclosure: I own Bitcoin and other cryptocurrencies.

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