In its latest post on CryptoQuant, XWIN Research Japan explores how developments in the US could impact the trajectory of Bitcoin and other risk assets in the near term. According to the institute, concerns are starting to emerge about a potential period of stagflation, which could potentially boost or damage Bitcoin’s growth.
As inflation intensifies, unemployment rises to 4%.
For context, stagflation is a rare economic situation that combines two worrisome events simultaneously: high inflation and high unemployment. In a QuickTake post on CryptoQuant, XWIN Research Japan revealed that the number of people employed in the United States fell by 92,000 in February, leading to a 4% increase in unemployment.
Subsequently, tensions in the United States increased due to geopolitical conflict caused by the U.S. and Israel’s attack on Iran. These conflicts have caused oil prices to rise and energy sources to become more expensive. According to XWIN Research Japan, this increase in energy costs may lead to significant inflation, completing the stagflation equation.
In particular, a shared historical example of stagflation occurred in the United States during the oil shocks of the 1970s. Inflation soared to double digits, and unemployment followed that same destructive path. Inflation was eventually brought down by Federal Reserve Chairman Paul Volcker, who raised interest rates to nearly 20%, resulting in a severe recession, according to XWIN Research.
How Bitcoin Adapted to Past Stagflation Periods
XWIN Research Japan added that the relationship between US stagflation and Bitcoin is a complex relationship rather than a linear and direct one.
Analysts explain that the early stages of stagflation are characterized by headwinds for risky assets. If inflation rises sharply (as we will see in 2022), both the NASDAQ and Bitcoin prices will fall sharply, indicating that Bitcoin has earned the title of high-beta asset.
However, the dynamics could quickly reverse if stagflation triggers financial instability, as was the case in the 2023 U.S. banking crisis. In this scenario, capital moved into high-risk assets like Bitcoin, sparking a bullish rally of over 80%. Additionally, Bitcoin’s unique supply structure must be taken into account while making predictions.
Unlike fiat currency, Bitcoin’s issuance is consistent with a fixed algorithm in which periodic halving events reduce the percentage of new supply in circulation. This means that Bitcoin’s inflation rate continues to fall, potentially increasing its attractiveness in markets where traditional currencies are affected by inflation.
If this current scenario holds, the Bitcoin market could witness significant inflows in the medium term. As of this writing, Bitcoin is trading at $68,225, a loss of more than 4% from the previous day.
Featured image from Flickr, chart from Tradingview
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