The Implication Of Stagflation On The Crypto Market

25 March 11:56

Stagflation can be defined as an economic condition characterized by slow economic growth, high inflation, and increased prices of goods and services.

Stagflation is an unusual economic crisis and has continued to disrupt experts' policies and predictions. Stagflation causes a declining GDP and a reduction in the masses' standard of living.

The term "Stagflation" was first used in 1960, and America witnessed the first Stagflation in 1970 due to the Oil Crisis.

Experts use the Misery Index to calculate the impact of Stagflation on an economy.

History shows that Stagflation has negative implications on the economy and takes a more extended period to recover from its effect.
There are popular opinions that you can use digital assets to cushion the effect of Stagflation.

Several economic situations can directly affect the economy and people of a society.

These economic conditions have pointers and indices that experts use in identifying how an economy is faring in a society.

These indices are in various terms, and whatever the economic situation of a particular environment or market is, there will always be a term to identify it. Some of the terms include Stagflation, inflation, deflation, etc.

This article will look at Stagflation as an economic situation and its impact on the general economy and the crypto market.

Before digging in, let us analyze what Stagflation entails?

What Is Stagflation?

Like other economic conditions, several metrics and market forces must be in place before you consider an economy to be in a state of Stagflation.

Stagflation is characterized by slow economic growth, a relatively high unemployment rate, increase in the price of goods and services. An economy or nation experiencing Stagflation is going through a hard time.

Experts define Stagflation as a period whereby inflation is on the rise combined with a declining Gross Domestic Product (GDP).

The effect of Stagflation covers every aspect of the economy. Stagflation mostly negatively impacts all economic sectors, and it takes a relatively long period to recover from the effect (especially in developing economies).

At this juncture, we shall take a brief look at the history of Stagflation.

History Of Stagflation

A brief look into history shows that Stagflation proved most economic theories and policies wrong.

In the Mid 20th century, Stagflation became a prominent example of how real-world economic data can deviate from the norm and go against predicted theories and policies.

In 1960, Lain Macleod, a United Kingdom Politician, first made mention of the term "stagflation" while addressing the House of Commons.

He identified Stagflation as inflation on one hand and stagnation on the other. The term was later used in the 1970s during the US oil crisis.

The oil crisis saw the US going through five quarters of negative GDP growth, a record recession period.

To understand the depth of Stagflation to the economy, experts discovered the Misery Index. You can calculate the Misery index by adding the economy's inflation rate and unemployment rate.

At this juncture, we shall take a comprehensive look at the Implication and impact of Stagflation on the crypto market.

The Implication Of Stagflation On The General Economy And The Crypto Market

The crypto market gained global acceptance at the peak of the CoronaVirus pandemic. Majorly all blockchain assets experienced a boom in value and patronage.

Surprisingly, in November 2021, the crypto market experienced a steep fall. Since that period, a sell-off of the top asset class has halved its global market value from $3 trillion to $1.5 trillion as of January 2022.

The popular belief and narrative by the crypto market industry players were that digital assets had no direct link to the traditional principle of supply and demand. It was believed that the traditional economy does not imply the crypto market.

This narrative proved to be true in the last five years. The massive price gain that the crypto market witnessed (consecutively) appeared to be directly influenced by speculation, market hype, network effects, and many others.

Albeit, in recent times, experts believe that traditional economic factors such as high inflation, interest rate hike, and massive sell-off in the stock market may directly affect the crypto market.

These traditional economic factors are the indices of Stagflation and are largely behind the recent decline that the crypto market is witnessing. Therefore, Stagflation has a negative implication on the crypto market.

Furthermore, there is a general belief that the current sell-off in the crypto market implies the high rates of inflation in the United States.

In December 2021, US inflation hit 7%, an all-time high since 1982. At the same period, a sharp decline began in the crypto market.

While experts and industry players believe that Stagflation will negatively affect the crypto market, there are strong indications that you can use blockchain assets to mitigate Stagflation itself.

How The Crypto Market Can Mitigate Against Stagflation

For instance, the cryptocurrency market cap is worth over a trillion dollars, and this market cap can absorb hundreds of billions of dollars simultaneously.

Therefore, when investors divert their funds into the crypto market and hold onto various digital assets for an extended period, the excess fiat (that should be) in circulation will be temporarily locked in blockchain wallets.

Since the increase in the price of goods and services is a strong indicator of Stagflation, when the excess money that will drive up the prices gets trapped in digital assets, the prices will eventually dropdown.

Conclusion

Stagflation is severe economic sabotage that deals a significant blow on all facets of society. Generally, you would expect that when there is plenty of money in circulation, the GDP is expected to increase, and unemployment should reduce.

However, Stagflation does not take that pattern; the excess money in circulation stays in the hand of few, leaving a more significant number of the population jobless and a declining GDP.

In addition, Stagflation affects the crypto market. During Stagflation, the prices of digital assets such as bitcoin tend to decline.

Albeit, some experts opined that digital asset demand increases during Stagflation. Some Experts believe that acquiring digital assets is a defensive mechanism to mitigate the effect of Stagflation on the economy.

Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
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