Robert Steinadler, 6 months ago
Stagflation is a phenomenon that is currently discussed among politicians, analysts, and the media. The term describes a cyclical situation that is characterized by the fact that the economy is not growing while the inflation and unemployment rates are at a record high.
The EU might end up in a scenario where stagflation is going to become a real problem and will change the way money is made through investing. It seems that the good old days of constant growth might come to an end.
What role can cryptocurrencies play in such a scenario and how can they make a valuable addition to a portfolio?
The view on Bitcoin has changed this year. In the past, it was revered by many analysts as an uncorrelated asset that can protect a portfolio because BTC was not moving in the same direction as stocks.
But with the current situation at hand, the market is behaving differently and Bitcoin and the Nasdaq appear to be highly correlated. You can easily check that in the charts. Each and every time the stock market took a nosedive Bitcoin and crypto followed. It is also the same picture with corrections. If stocks go up, Bitcoin goes up. One explanation could be that investors have lost their appetite for risk and since growth markets are expected to have a hard time during stagflation, they sold which caused the decline that we can observe since the beginning of this year.
While the tech industry became dependent on cheap money (meaning: low interest rates on loans) in the last few years Bitcoin on the other hand has no dependence in this regard. It is ultimately scarce and might become uncorrelated to stocks again during times of recession. If history repeats then scarce commodities like gold will become important. In such a scenario Bitcoins scarcity could make it more valuable.
Without growth, many companies may be doomed since their business model is very dependent on cheap money and growth. If that should turn out to be the case many investors will look for investments in companies that don’t have dependencies but rather make money no matter what the market conditions are.
When we speak about crypto, things are very similar. If an investor buys Bitcoin, he can only speculate that the price is going to be higher at some point in the future. There is no element that creates income by holding Bitcoin.
Proof of stake blockchains on the other hand, offer even retail investors a way to gain passive income on their investment. One risk that they are taking is that these coins and tokens might also see a decrease in price over the next two years or so. The upside is that they are receiving some sort of income that can be sold directly for Euros. Assuming that the crypto market could suffer during stagflation having the opportunity to earn passively offers a different perspective.
It looks like tech companies are betting on the metaverse as the next big thing that is going to change the world and introduce the masses to Web3. Facebook even rebranded into Meta since the company has a clear goal of changing its nature in this regard.
We don’t know for how long coins and tokens associated with the metaverse might decline or maybe rise in price. What we can speculate on is that there is always some sort of growth created especially if an economy is digital and global. This makes it easier to onboard more users and customers and creates revenue.
Many huge brands have already placed their bets on the metaverse and work behind the scenes to turn it into the next big thing.
Stablecoins have been going through a very difficult time in the last couple of weeks. It is worth remembering that not all of them face the problems of algorithmic stablecoins. Their peg to the US-Dollar is established by companies who hold the equivalent in dollars or dollar-denominated assets.
This offers interesting opportunities for investors in Europe. If we assume that stagflation will come then the dollar might be more valuable than the Euro. Stablecoins allow exposure to the dollar at low cost, high liquidity, and the option to sell or swap them for Euros more quickly.
The idea might seem a little bit odd of holding dollars during inflation. But there are situations possible where the market is too volatile and the dollar could potentially offer a better value than the euro. Holding dollars might not be the typical use case that one can think of when looking at crypto, but it might be a promising use case outside the US since stablecoins allow the easiest and quickest access to the dollar.
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