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The crypto market has acquired significant momentum during the past decade as major brands and new users enter the digital industry. Despite being a stable and reliable system, cryptocurrencies have faced tough times but have still pulled through. An important question is whether the crypto market is vulnerable to stagflation. Stagflation was a household phenomenon when the United States was taken off the gold standard by former President Richard Nixon. Stagflation is an acute situation where inflation rates surge above anticipated scales in an economy. In such an event, unemployment rates surge significantly, in the long run proving to be detrimental to the economy.
Future Stagflation
Stagflation has recently become a hot topic among investors, and it is a looming threat to the global economy. An example of such an event was when the Standard & Poor 500 Index of US stock averaged at +2.5%, but during stagflation, it was a 2.5% decline. Stagflation is a reality considering that the positive correlation between crypto and NASDAQ keeps getting tighter. The ever-growing popularity of crypto and the blockchain industry has created high demand for digital assets. Moreover, stagflation has been linked to declining profit margins, when companies face dwindling sales and higher prices. During such an event, the demand for digital assets will increase. If the rates increase and the economy slows, asset prices will decline, including cryptocurrencies like Bitcoin.
What Stagflation Means for Crypto
Stagflation refers to a period when the economy has rising inflation, a higher unemployment rate, and a stagnation of economic output. The cryptos like Bitcoin have survived many events in the past and still prove to be resilient in surviving recession events. Regardless, stagflation is a whole new bag of challenges. Here is why the crypto market is still vulnerable to stagflation:
Looming Threats
Renowned analytics and economy experts have warned the crypto market to brace itself for unprecedented times. Chances of a stagflation event are constantly brewing. Most cryptos like BTC have proven inflation-proof, considering it's limited to 21 million tokens based on its source code. However, most investors are still skeptical about digital assets due to their falling prices. A swarm of unfortunate events can be ushered in, and stagflation is among them.
War
Proving its resilience during the recent COVID 19 pandemic, crypto has proven its adversity against economy-crippling events. The war between Russia and Ukraine is another factor that has shaken the global economy. Russia being a major producer of oil globally, oil prices have surged over $100 due to the war. The tension continues to challenge the entire digital ecosystem in Eastern Europe. Prices of other intrinsic products are pegged to surge, considering the situation keeps escalating. The recent crypto market crash resulted from the military attack on Ukraine, predicting a more frightening future for cryptocurrencies. The war triggered grim situations. There exists a direct correlation between crypto and NASDAQ following the current war between Ukraine and Russia. At first, there was a bit of stability in the cryptocurrency market. As the war continued, it crippled hopes of creating a robust digital ecosystem.
Surging Energy Prices
As inflation rises in a stagflation event, energy prices are affected and keep surging upwards. It means that gas prices increase, and manufacturing production costs are passed on through high prices to consumers. It, in turn, lowers the economic output. Considering that cryptocurrencies like Bitcoin rely on energy to be minted, it would be challenging to mine BTC, affecting its supply. The digital market feels the chills resulting from the long period of constant sell-offs. The flagship crypto is flashing red, recording a 33%+ loss in the market value of cryptos. According to Scott Minerd, a Guggenheim executive, Bitcoin’s price would drop to $8,000, indicating a 70% drop. Since its peak of $69,000 last year in November, the pioneer crypto lost more than half of its price value, recently touching a 17-month low of $25,400 on 12th May.
Conclusion
Stagflation affects profit margins the most since it cripples chances of generating profits. The recent global events have proven how the crypto market has been a massive aid in resolving various situations. However, the crypto market is still vulnerable to stagflation, although major assets like Bitcoin and Ethereum might survive.