Could Bitcoin Benefit From Stagflation?

The last time that investors had to deal with stagflation, Bitcoin was decades away from being created. That dreaded word is making its way around investor circles again. Here’s what I think that it could mean for digital gold.

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Why Trump-Induced Stagflation Could Finally Make Bitcoin a Safe Haven

Historically bitcoin has failed to live up to its investment thesis as an inflationary hedge or safe harbor asset. But Trump’s tariffs could change that.

As the global economy anxiously awaits President Trump’s tariff announcements, some traders are already thinking about worst-case scenarios. In today’s climate that means stagflation, a troublesome economic climate defined by high inflation and low growth.

“Tariffs are a stagflationary shock to the economy. They reduce growth and raise inflation,” says Zach Pandl, head of research at digital asset manager Grayscale and a former senior economist at Goldman Sachs. “What we don’t know is the mix in terms of stagnation and inflation. At the moment, markets are more focused on stagnation, but we very well may see more inflation persistence over time.”

For many investors, especially those with bitcoin exposure, a key question is how the asset class will perform in such an environment. After all, the last period of stagflation occurred, at least in the U.S., in the 1970s due to the Arab oil embargo of the U.S. These are questions that have not needed to be addressed for 50 years — long before Satoshi Nakamoto wrote the famous Bitcoin white paper. 

Bitcoin’s history during periods of market turmoil is not necessarily encouraging. During the market recession in 2020 at the outset of the COVID pandemic the asset briefly dropped below $4,000. At other times of market stress, such as the unwinding of the Japanese yen carry trade in August 2024 or the broader market downturn in 2022, it behaved more like a speculative asset than the store of value that it is purported to be.

But there is reason to be cautiously optimistic about bitcoin’s chances this time, Pandl says. “Much like the 1970s was a breakout period for gold [which had an average annualized 31% return], I believe that the coming decade will be a breakout period for Bitcoin. It's the right macro asset at the right time, and we have significant improvements in market structure creating more investor access to the product.”

Stagflation = Gold Rush

Stagflation is an exceptionally rare occurrence, even during poor economic climates. The U.S. has had 16 recessions in the past 100 years, but only one period of stagflation: the 1970s. And given the economy’s ongoing resilience, it’s not a material concern yet.

“Although there are concerns about stagflation, we're nowhere near what occurred in the Seventies. At that period of time, there was a period of excess in the Sixties, the Vietnam War, and then you also had this exogenous shock of the Arab oil embargoes. The price of energy skyrocketed and the nation just was not ready for it,” says Steve Sosnick, Chief Strategist at Interactive Brokers. Sosnick went on to point out how, at 4% unemployment, the U.S. economy remains in an enviable position. Also, inflation, which peaked to 1970s levels just a couple of years ago, is now down to 2-3%.  

But even according to Sosnick, the threshold for stagflation does not have to meet the trauma of the 1970s. “If you want to define stagflation as a period involving a stagnating economy and higher prices, then I think it's hardly an idle concern,” he says. 

So how did markets react to the shock of the oil embargo, which started in 1973? They bought gold and moved away from stocks, as indicated in the chart below. The S&P 500 only gained 26.99% for the entire decade, an annualized growth rate of a little over 2%. Considering the double-digit inflation of that period, anyone holding shares in those stocks lost money in real terms. Conversely, gold offered 30% annualized returns for most of the decade, and then it surged more than 500% at the tail end of the decade after concerns about persistent inflation really took hold.

This inverse relationship between gold and stocks has been consistent through the decades. The only real exception was when they rose at the same rate during the COVID outbreak, as the Federal Reserve injected trillions of dollars into the economy and buttressed virtually every asset class in the world.

It is even holding true again in 2025 as concerns about the impact of President Trump’s erratic tariff policies spook markets. Gold continues to set record highs, and it is currently priced at $3,171 per oz, while bitcoin is trailing both the S&P 500 and tech-heavy Nasdaq 100.

Bitcoin: Finally a Safe Haven?

Will things be different this time? It is important to start with some key assumptions. For starters, it seems likely that either due to reduced trust and confidence in the U.S. economy or pro-active policymaking from the Fed to reduce interest rates, the dollar is going to drop. 

Pandl says of the FOMC meeting earlier this month when the rate-setting body held steady, “The message from Jay Powell sounded to me as if they are more likely to reduce rates to support the economy rather than raise rates to try to bring down inflation.”

This means that the U.S. dollar, which has charted an upward trend over the past 15 years or so since the Great Financial Crisis, could be due for a reversal. 

In that case, the question becomes what will traders use to substitute the dollar in their portfolios. Sosnick points out that other currencies could take some of its place: “When you're trading currencies it's A versus B.” The euro could be a strong contender, as it has appreciated almost 4% against the dollar in 2025, a gargantuan move for major currencies in such a short period of time, and its major stock indexes are outperforming their U.S. counterparts. However, most analysts are still having a tough time trusting the current surge in European equities and hardly anyone expects the euro to unseat the dollar.

So then it all comes back to the gold vs. bitcoin discussion. There are reasons to be optimistic and pessimistic. On the pessimistic side, historically, bitcoin has hardly traded like the store of value that it is purported to be. Additionally, most of the new flows into the assets have come from U.S. investors looking for outsize risk-weighted returns, not a hedge on local fiat.

From the optimistic side of the ledger, there are a few things to consider. For starters, most of the new gold demand has not come from retail traders but from central banks around the world looking to de-risk themselves from the dollar. Since it’s now easier than ever for retail traders to add gold to their portfolios, it seems they are choosing not to do so. They may prefer to find their hedges somewhere else. Perhaps bitcoin.

But, this new demand for bitcoin may need to come from retail buyers outside of developed economies, a growing but still small part of the overall crypto investment economy. This is because they would be buying bitcoin as a hedge rather than a speculative instrument. Many are also buying stablecoins as a way to de-risk themselves from their local currencies, but as access to this industry becomes more democratized, demand could grow for both asset classes, though it could take time. The bull case for bitcoin would be that a period of stagflation would depress the dollar to a point that bitcoin is seen as the better store of value for emerging market investors.

But as the economy enters this uncertain period of time all investors need to take a long-term perspective with regard to their portfolios. Yes, gold dramatically outstripped equities during the ’70s, but the role reversed in the 1980s (see below). If traders are confident in the long-term ability of bitcoin to manifest its mission as a hybrid of digital gold and a speculative asset, then it could serve as a welcome landing spot for them.