Economic stagnation may be accompanied by the incredibly unusual occurrence known as stagflation. In comparison to inflation and economic development, which take place when prices increase and economic output rises, stagflation is when none of these things happens.
We will discuss how stagflation is affecting the cryptocurrency markets in this post.
What is stagflation?
When the economy is not expanding quickly enough to meet the requirements of its citizens, economic stagnation occurs. The phrase “stagflation” refers to a situation in which the economy is in decline and inflation is high. Stagflation might be perceived as a contradiction because such conditions normally do not coexist.
An economy expands so slowly during stagflation that unemployment increases. Prices are growing even if businesses appear to be selling all of their stock. As a result of the declining demand for products and services, there may be more unemployment.
The amount of money that will be available for future purchases is unknown to people in economies with high inflation rates. It is challenging to invest and plan for the future when inflation is present since no one can forecast their income in the future. More uncertainty and slower growth are the results of this. As a result, “stagflation” is a conjunction of “inflation” and “financial stagnation.”
One of the clearest examples of stagflation may be found in the 1970s, when global fuel shortages led to sluggish economic development, rising unemployment, and skyrocketing prices in a number of developed economies. As was the case when the US currency was decoupled from the gold standard, stagflation can also be caused by monetary or fiscal policy.
Why does stagflation occur?
An phenomenon known as a supply shock raises prices without altering the overall level of demand or business inventory. It’s probable that these shocks are brought on by human activity. Cost-pull inflation, or inflation brought on by a rise in the costs of rising salaries and raw materials, is inflation brought on by, for example, a battle between states that increases the price of oil or another essential component of production.
In addition to price rises brought on by natural disasters, supply shocks can also result in price increases. In other words, a change in the production process causes a reduction in the supply of goods or services, which causes demand-pull inflation, a particular kind of inflation brought on by supply restrictions.
Monetary policy mistakes are when central banks handle a country’s money supply incorrectly. Given how low the interest rates are, what if they give out too much credit? In that scenario, as interest rates fall, consumer prices and wages will rise. However, stagflation can also result from a decline in economic activity when excessively high interest rates are present.
Also read: Crypto Is Likely To Survive Its 1st Ice Age
What effects does stagflation have on crypto markets?
Consider how traditional markets behave and why during inflation and stagflation to understand whether investing in cryptocurrency is viable. Due to the close relationship between cryptocurrency markets and broad indices and the fact that inflation is terrible for traditional markets, it is possible for it to spread to cryptocurrencies, which are digital assets managed by cryptographic algorithms.
Generally speaking, investors who store their money in traditional assets might be more willing to weather economic turbulence than investors in cryptocurrencies, which are known for having higher volatility. As a result, during a stagflationary period there might be less demand for cryptos than usual.
Due to the decreased interest of individual investors in purchasing digital assets, stagflation may potentially harm the market for cryptocurrencies. Considering that cryptocurrencies are more risky investments, excessive inflation immediately affects the amount of money people have available to invest in them.
Nevertheless, a person’s bitcoin investment strategy may lead them to choose these assets over more traditional financial goods to invest in. Cryptocurrencies run on a blockchain, as opposed to fiat currencies, which are tied to a particular country’s monetary policy. Traders can still benefit from gains made through cryptocurrency investments when inflation goes up in one country but not another, even while their local currency drops as a result of inflationary forces.
Investors commonly look for ways to safeguard their money from stagflation, especially in countries where hyperinflation is a problem, like Venezuela or Argentina. Hyperinflation is the term used to describe a rapid and unchecked increase in the price of necessities in an economy. Investments in bitcoin are good in this situation because they provide a different payment method and protection from hyperinflation during stagflation. Several people may choose to invest some of their fortune in Bitcoin in order to avoid hyperinflation.