Stagflation – What do investors have to be prepared for?

The continuing supply chain problems and the Ukraine war have triggered panic on the commodity markets. The prices for fossil fuels, industrial metals and agricultural commodities are reaching unprecedented heights. The consequence: everything becomes more expensive. The bread roll from the baker is not only more expensive due to the sharp rise in electricity prices, but also because the price of wheat is simply shooting up.

At the same time, employees and trade unions are putting pressure on salaries – for understandable reasons. The momentum of the dreaded wage-price spiral could take full effect in the next few weeks. Average inflation of 5.8 percent in the euro zone could soon catch up with EU leaders Lithuania, Latvia and the Czech Republic. The purchase price control there is already over 10 percent.

Should growth fail to materialize, the specter of stagflation would threaten our prosperity. It would then no longer be possible to adequately compensate for the rising inflation through growth. The majority of investors are losing money, so they are simply getting poorer. Most public companies fall in value during periods of stagflation. But what about cryptocurrencies, especially BTC, in a stagflation?

Stagflation: Experience values ​​for BTC equal to zero

Nobody is able to predict the inflation rate. Neither the European Central Bank nor investment banks nor financial analysts on YouTube. However, the probability of certain scenarios is increasing. One such scenario is the much-discussed stagflation. The difficulty: Ever since the cryptocurrency asset class has existed, there has been no stagflation in the major industrialized nations. So there is a lack of empirical values ​​for the asset class, which is difficult to assess anyway.

Accordingly, it can make sense to orientate oneself on the reaction of technology or risk assets. After all, these have shown the highest correlation to cryptocurrencies to date. Like the growth stocks of an ARK Innovation ETF, most cryptocurrencies have fallen by 50 percent or more since their correction began in November last year.

The big problem of inflation

In isolation, higher inflation isn’t inherently bad for tech stocks or BTC. However, with rising inflation, the probability of an interest rate hike by the central banks also increases. The result is a less accommodative monetary policy, which in turn is very bad for BTC and tech stocks and good for US dollars and government bonds. As a result of the change of course by the US central bank, the above-mentioned innovation stocks are therefore under a lot of pressure. Eventually, the cost of financing growth increases and the opportunity cost increases.

If the corresponding growth does not materialize, i.e. inflation becomes stagflation, then the current development could even intensify. Historically, gold and commodities are the only assets that have experienced severe stagflation in the past.. This was followed by real estate, which was also able to increase, while stocks lost value on average. Applying this logic to cryptocurrencies does not look good for the asset class during stagflation.

BTC no digital gold for the time being

However, there is still hope. So far, the market has not accepted the narrative that BTC is the new digital gold. While some crypto wealth managers may write that on their promotional flyers, and even BTC devotees may 100 percent support the digital gold narrative, the reality is different. When there was market panic, as is currently the case with the Ukraine war, gold and not BTC was the asset of the hour. In the past, BTC was not convincing either as a short-term protection against inflation or as a safe haven.

The chance that BTC will be perceived differently by investors in the future, or that its correlation to risk assets will change and also effectively become digital gold, could have a positive effect on the No. 1 cryptocurrency. Unfortunately, the conclusion that the digital gas of the ETH blockchain also correlates with the physical gas price is too far-fetched. Finally, there is a supply shock for physical energy sources. On the other hand, the Ukraine war has had no effect whatsoever on the offer of Ether and Co. It is more likely that altcoins will be valued by the market like start-ups or young growth companies and will therefore come under pressure in stagflation.

Growth despite stagflation

Just because there is no growth and inflation is high, it does not mean that every company or every cryptocurrency has to lose value. Rather, such phases are to be understood as statements of trends. Should mean that you can very well make a lot of money with stocks on the long side. In contrast to the last few years, you have to rely on the right candidates. Stock picking instead of ETF acquisition would be the conclusion.

Even in the most difficult market phases, there are companies that can increase profits and expand market share. There can therefore also be growth in stagflation, but it is then more likely to be found on the individual level or micro rather than macro level. But what does this logic mean for the cryptocurrency market?

Crypto market: is the big decoupling coming now?

The biggest opportunity for the crypto market is that so-called mainstream adoption will increase to such an extent that the negative market environment will be overcompensated. The crypto sector would then decouple from tech and growth stocks. A look at the S&P 500 would then no longer be enough to know whether the signs on the crypto market are green or red.

A decoupling through growth in a phase of stagnation would certainly be a desirable scenario, as it would mean massive strength and undervaluation relative to other asset classes. However, the recent past of the crypto sector has shown that extreme leaps are possible in a very short time. In particular, if the biggest drag on cryptocurrency prices, namely regulation, were to turn positive, this could mean capital inflows that overshadow a weak market environment.

Conclusion on stagflation and BTC

The well-known stagflation outgoing from 1972 up to and including 1982 in the industrialized countries can be traced back to an oil price crisis. We haven’t been this close to an energy crisis in 40 years. The fear of stagflation and an economic slump seems correspondingly logical in view of the inflation rate and the sharp rise in oil and gas prices. After all, every oil price increase in the last 50 years of more than 50 percent has led to a subsequent recession in a short period of time (see chart below). However, the stable unemployment rate and the solid situation among companies so far still argue against stagflation.

In the short term, the negative effects on BTC and the crypto market may prevail. It is not to be expected that BTC will still be perceived by the market as digital gold. Except for Russian oligarchs with a monetary flight instinct. A further escalation of the Ukraine war and a possible oil embargo could push the financial markets down even further. Those who act now have to deal with maximum volatility in both directions.

Such real economic influencing factors could therefore also have an impact on the financial sector for the time being and prevent rallies. From a fundamental point of view, the Ukraine war and the threat of stagflation have not changed the prospects of BTC and Co. So if you are convinced of the success of the assets mentioned, you can use such market phases to buy more.