Impending economic slump: What does that mean for cryptocurrencies like Bitcoin, Ethereum & Co?

• World economy threatened with stagflation for months

• So far, the crypto market has been strongly correlated with technology stocks
• Decoupling of cryptocurrencies from stock markets possible

The crisis reports have also been piling up in the economic sector for several weeks. First the global inflationary pressure that has persisted for more than a year, which as a result of the extremely expansive monetary policy and the supply chain problems endangers the economic post-corona recovery effects. Then the intensification of the inflationary tendencies due to the Russian attack on the Ukraine and the associated Western sanctions against the world’s most important supplier of raw materials, Russia. And as if that weren’t enough, the powerhouse of the global economy, China, recently announced a tough lockdown in the megacity of Shenzhen. In short: The global economy is faltering – doesn’t that bode well for the crypto sector either? A closer look is worthwhile.

Post-sanctions global stagflation increasingly likely

Stagflation, the coincidence in time of economic stagnation and inflation, is a portmanteau that most people would like to expunge from their vocabulary forever. However, the current situation is similar to that in the 1970s, when the term stagflation was invented as a result of the 1973 oil crisis. Similar to that time, there will also be an oil supply shock in 2022 triggered by armed conflicts, which will possibly keep energy prices at a high level for years. The main sufferers are the companies that pass the high energy prices on to their customers. If wage levels then fail to keep up with inflation levels, mass purchasing power falls in turn – fewer products are bought, which in turn means fewer jobs are created: the vicious circle of stagflation.

Equities have provided investors with disappointing returns during recessions, especially when they have been associated with inflationary tendencies. The stagflation of the 1970s led to a bear market that lasted for years. Risky investment instruments are traditionally particularly avoided by investors in times of crisis – so also cryptocurrencies?

Bitcoin really the “digital gold”?

Crypto enthusiasts have hailed Bitcoin as the “digital gold” for years. They base this comparison primarily on the fact that Bitcoin, like gold, has a supply limit – unlike the fiat money printed by the central banks. In fact, the number of bitcoins is limited to a maximum of 21 million. So, in the 2020s, can bitcoin do what gold did in the 1970s, when it was a highly effective inflation hedge? Crypto fans are convinced of it. They stress that confidence in fiat currencies will continue to crumble as a result of soaring inflation rates. Gunther Schnabl, Professor of Economic Policy and International Economic Relations at the University of Leipzig, says to BTC-Echo: “The long-standing loose monetary policies of the central banks have undermined confidence in the paper currencies. This process has again accelerated significantly in recent months .” Not least because of this, well-known entrepreneurs and investors are outdoing each other with their bullish forecasts. Steve Wozniak, co-founder of Apple, recently announced that he thinks Bitcoin prices of more than 100,000 US dollars are likely.

Stock market expert Jessica Schwarzer, on the other hand, is very skeptical. In her column “Sekt & Selters” on t-online, she replies to the crypto-romantics: “Bitcoin is not the new gold. It is not a safe haven, no insurance in stormy times.” Rather, Bitcoin is a high-risk investment product and falls even more sharply than stocks in times of crisis – so Bitcoin is rather the exact opposite of gold, according to Schwarzer. On the other hand, it must be noted that both gold and bitcoin have no intrinsic value since – unlike corporate equity, also known as stocks – they produce nothing. Their price is therefore based solely on investor demand, which can lead to significant price caprioles.

Optimal scenario for crypto investors: decoupling from the stock market

However, the fact that Bitcoin has no intrinsic value can also bring benefits. So there is the possibility that the cryptocurrencies could decouple themselves from the stock market in the medium to long term. So far, the crypto sector has largely followed the trend of high-growth technology stocks, symbolized by the leading index of the US technology exchange NASDAQ 100. This correlation has been particularly visible in the last few months: A weak phase in May and June 2021 followed for both Asset classes rose sharply into late November before tech stocks and bitcoin have since suffered significant losses.

The hope of crypto fans is that Bitcoin and other cryptocurrencies can emancipate themselves from the influence of growth stocks in the future. This could mean that the crypto sector is generating a positive return even in a stagflation environment. The better performance of bitcoin, so the argument goes, is due to the fact that it can continue to grow relatively independently of the economy. In addition, more and more investors would add bitcoins to their portfolios due to concerns about inflation. In this case, Bitcoin & Co. could paradoxically even benefit from stagflation.

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