Chart of the Week | Bitcoin and... Stagflation?

Good morning everyone and welcome to our Chart of the Week series! Every week we provide you with one of the most informative Bitcoin charts, sent directly to your inbox. This week we dive into Bitcoin’s volatility compared with the rest of the market.

On Wednesday, some economic data was released that many commentators are characterizing as stagflationary. What is stagflation, what did the data actually show, and how might it affect bitcoin? Staglfation is an uncommon economic regime in which an economy faces higher than average inflation, mixed with low aggregate growth. Essentially, it is the worst of both worlds, as there isn’t even high nominal growth to “offset” the inflationary impacts. 

The economic data released on Wednesday did indeed show a quarter of negative GDP and a higher PCE (inflation) number than expected, though it’s important to go a bit deeper beyond the headline number. 

Growth

One of the main components of GDP, is the difference between exports and imports- imports subtract from GDP, and exports add to GDP. Given historic tariffs, many companies have frontran them by pulling forward imports and building inventory before the tariffs hit. This has caused the balance of trade to blow out recently, as we’ve been covering which also caused the Atlanta Fed’s “GDP Now” estimate to predict that the first quarter would show -2.7% GDP contraction.

However, while this transitory trade balance dynamic did affect the number, it was nowhere near as bad as had been indicated a couple of months ago. For Q1, GDP contracted by 0.3%, dragged down by not only this transient trade practice, but also by cuts in government spending by DOGE. Once adjusting for these two factors, the quarter actually had a GDP growth of over 2%, led by unusually strong consumer spending and business investment.

Inflation

The Personal Consumption Expenditures index is one way to measure inflation, next to the more well-known “CPI” index, but the two are very similar. This week, quarterly PCE data appeared to have accelerated, to an annualized growth of 3.5%, which is well above the Fed’s 2% target. However, month-over-month PCE actually came in at 0%, the first time since the summer of 2020 in the heights of Covid and the annualized number actually fell to the lowest level since the summer of 2024.

What Does it Mean for Bitcoin?

Whether you choose to interpret the data as stagflationary, it’s important to remember that bitcoin has never really seen a significant period of negative growth. Bitcoin was spawned in the Great Financial Crisis, but had such low adoption that this time period isn’t very instructive. 

Indeed, in 2022 there were two consecutive quarters of negative GDP growth (the widely agreed upon definition of a recession), though the contraction was brief and shallow. Still, we know that the period of early 2022 into the summer, was a significant bear market for bitcoin. The very brief period associated with COVID, did also result in a sharp sell off in BTC, though this was reversed quickly.

The other key economic data point to watch, in terms of overall aggregate economic health, is the labor market, as a sharp increase in unemployment is one of the components of a recession (and the reason NBER gave for not declaring 2022 a technical recession). 

Importantly, jobless claims and ADP private payrolls data both surprised to the downside this week, so it will be important to watch whether this negative labor trend continues, as it could indicate the presence of a recession. When unemployment skyrocketed due to Covid, bitcoin faced weakness, but the period of rising unemployment over the past three years (22-present) has not seemed to be a headwind for bitcoin. 

Conclusion

One thing we know for certain, is that bitcoin tends to perform well during periods of higher inflation, as we saw in the bull market of 2021. However, this period of time also had high nominal growth and an improvement in the unemployment rate, so it is tough to say if the historically strong performance could repeat in the face of lower growth and higher unemployment.

The last time the US economy really saw staglation was in the 1970s, and looking at the cross-asset performance, the best performing asset during this time was gold- notching a mind-blowing run from $35/oz to over $800/oz in less than a decade. 

Given bitcoin’s properties, it would probably be safe to say that this could be a tailwind for bitcoin, should the market wake up to bitcoin’s true nature, which we continue to believe that it will.

That’s it for this weeks edition, remember to stay humble and stack sats!