In its latest article in CryptoQuant, XWIN Research Japan explains how the developing work in the United States can affect the trajectory of Bitcoin and other risk assets in the near future. According to the academic institution, concerns have been raised about a possible period of stagflation, which could potentially boost or derail Bitcoin’s growth.
Unemployment reaches 4% as inflation rises
For context, stagflation is a rare economic condition that involves two things happening at the same time: high inflation and high unemployment. In its QuickTake post on CryptoQuant, XWIN Research Japan shows that the number of people working in the United States fell by 92,000 in February, which represents a 4% increase in the unemployment rate.
This was followed by a growing state of tension in the United States due to geopolitical conflicts caused by the joint US-Israeli attack on Iran. This conflict caused the price of oil to rise and made energy sources even more expensive. According to XWIN Research Japan, this increase in energy costs can also lead to inflation, thus filling the stagflation equation.
Notably, a common historical example of stagflation in the United States occurred during the oil shocks of the 1970s; Inflation has risen to double digits, with unemployment continuing on such a devastating path. According to XWIN Research, inflation was finally brought down by Federal Reserve Chairman Paul Volcker, who raised interest rates to nearly 20%, triggering a deep recession.
How Bitcoin Has Matched Past Stagflation Periods
XWIN Research Japan further notes that Bitcoin’s relationship with US stagflation is complex rather than linear and straightforward.
Analysts explain that the early stages of stagflation are accompanied by headwinds towards risky assets. When inflation rises sharply (as seen in 2022), both the NASDAQ and Bitcoin prices fall sharply, indicating that Bitcoin has become a high-beta asset.
However, the dynamic may see a quick reversal in cases where stagflation creates financial instability, as was the case with the US banking crisis of 2023. In this scenario, capital moved to high-risk assets like Bitcoin, leading to a rise of more than 80%. Also, Bitcoin’s unique supply structure should be considered when making predictions.
Unlike fiat currencies, the issuance of Bitcoin follows a fixed algorithm, in which periodic events at noon reduce the rate of influx of new supply. This means that the rate of inflation in Bitcoin will continue to decrease, thereby increasing the possibility of its appeal in a market where traditional currencies suffer from the effects of inflation.
If this scenario plays out now, the Bitcoin market could witness significant inflows in the medium term. As of this writing, Bitcoin is trading at $68,225, a loss of over 4% since the previous day.
Featured image from Flickr, chart from Tradingview
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