Stagflation: How Bitcoin Fares in This Scenario
Stagflation and bitcoin: what the 1970s teach about gold, stocks and bonds, what 2022 with −77% shows, and how you prepare as a holder.
Short answer: Nobody knows how bitcoin would get through a long stagflation, because it has never lived through one. The only test so far was 2022: high inflation, fast-rising interest rates, and bitcoin fell 77% from its peak. In the 1970s, the classic case, gold won while stocks and bonds lost after inflation. Whether bitcoin behaves more like gold or like a tech stock in a real stagflation is an open question. You can still prepare: with a cash reserve, without loans and with a horizon of many years.
Stagflation is the scenario central banks fear most: against inflation they raise rates, against a weak economy they cut them. When both come together, neither really helps. How policy rates generally affect the price is explained in Interest Rates, Central Banks and Bitcoin.
What is stagflation?
The word combines stagnation and inflation. The British politician Iain Macleod used it in the House of Commons in 1965. It describes a situation where three things come together:
- Prices rise much faster than usual, well above the 2% central banks aim for.
- The economy barely grows or shrinks.
- Unemployment rises.
For you as a saver, stagflation hurts twice: your money loses purchasing power, and your income is less secure. How inflation alone eats into your savings is shown in Inflation and Loss of Purchasing Power.
The classic case: the 1970s
What happened
The prelude came in August 1971. US President Nixon ended the promise to exchange dollars held by other central banks for gold at $35 an ounce. With that, the last fixed link between the world's money and gold was gone.
In October 1973 came the oil shock. The Arab oil states imposed an embargo on the US and other countries, and the oil price quadrupled within a few months. West Germany had car-free Sundays in November and December 1973. Prices rose while the industrial countries slid into recession in 1974/75. In 1979 the Iranian revolution brought the second oil shock.
The key figures for the US:
| Indicator | Value |
|---|---|
| Inflation, peak | 14.8% in March 1980 |
| Unemployment | 9.0% in May 1975, 10.8% at the end of 1982 |
| Policy rate under Fed chair Paul Volcker | up to about 20% in 1980/81 |
| Stock market, S&P 500 | −48% from January 1973 to October 1974 |
| Gold price | from $35 (1971) to $850 (21 January 1980) |
West Germany got off more lightly: the Bundesbank kept money tighter, inflation was around 7% in 1973/74, and unemployment still rose.
In the US, stagflation only ended with a hard cut. From 1979 Paul Volcker raised the policy rate so far that the economy fell into two recessions. Afterwards inflation came down, and a long boom began for bonds and stocks.
How assets fared
Gold was the clear winner. From the end of the peg in 1971 to the peak in January 1980 the price rose more than 24-fold. Part of that was catching up, because the price had been fixed for decades. Part of it was flight from paper money.
Stocks did not look disastrous on paper, but they did after inflation. At the end of 1982 the Dow Jones stood barely higher in nominal terms than in 1966. In the meantime US prices had almost tripled. Anyone holding stocks lost a large part of their purchasing power over 16 years.
Bonds were the biggest losers. Their interest rate was fixed at purchase, and inflation then rose far above it. Anyone who bought a long-term government bond in 1970 got their money back, but it was worth only a fraction.
How to calculate the real return
Real return = (1 + nominal return) ÷ (1 + inflation) − 1
Example: a stock returns 5% a year, inflation is 9%.
(1.05 ÷ 1.09) − 1 = −3.7% per year
After ten years: 0.963¹⁰ = 0.686, so about 31% less purchasing power, although the price rose by 63% (1.05¹⁰ = 1.629).
Gold won in this period, but gold is not a safe haven in every situation either: after the 1980 peak it took 28 years for the price to get back there in nominal terms. The full comparison of the two scarce assets is in Bitcoin vs. Gold.
Bitcoin has never lived through a long stagflation
Bitcoin has existed since January 2009. Its whole history falls into a period of mostly low inflation and low interest rates. So there is no data on how bitcoin would get through a decade like the 1970s. Everything said about it is reasoning, not experience.
Two arguments face each other:
- Bitcoin like gold: the supply is fixed, no central bank can create more. If trust in paper money suffers, as in the 1970s, bitcoin could benefit much as gold did.
- Bitcoin like a tech stock: so far many investors have traded bitcoin like a risky growth asset. When money becomes scarce and expensive, they sell what swings the most first.
Both can be true, just at different times.
What 2022 shows, and what it doesn't
The figures
2022 came closest to stagflation since bitcoin has existed. US inflation reached 9.1% in June, the euro area 10.6% in October. Within a year the Fed raised its policy rate from near zero to over 4%, and the ECB followed from July. Stocks and bonds both fell by double digits in the same year, which is rare. Gold roughly held its value in dollars.
Bitcoin lost much more than all of them:
| Peak 8 Nov 2021 | Low 21 Nov 2022 | Change | |
|---|---|---|---|
| In US dollars | $67’525 | $15’784 | −77% |
| In euros (approx.) | €59’160 | €15’470 | about −74% |
| In Swiss francs (approx.) | CHF 62’250 | CHF 15’230 | about −76% |
| Calendar year 2022 (31 Dec to 31 Dec) | $46’220 | $16’545 | −64% |
A new high above $67’525 only came on 4 March 2024, almost 28 months after the old peak.
How the figures are calculated
Decline = low ÷ high − 1
In dollars: 15’783.50 ÷ 67’525.10 − 1 = −0.766, so −77%
In euros: daily close in dollars divided by the monthly average EUR/USD rate (November 2021: 1.1414; November 2022: 1.0201), giving €59’160 and €15’472. 15’472 ÷ 59’160 − 1 = −0.738, so about −74%. Because monthly averages are used instead of daily rates, the euro and franc values are rounded.
Calendar year: 16’544.90 ÷ 46’219.90 − 1 = −0.642, so −64%
All prices from the site's daily data, exchange rates from the ECB reference rate.
The chart shows how this crash compares with earlier bear markets. Each line starts at its all-time high:
What 2022 shows
Bitcoin reacts strongly to expensive money. When rates rose quickly and the real interest rate turned from clearly negative to positive, bitcoin fell more than stocks. In this phase it was no protection, but one of the riskiest assets on the market.
Leverage makes everything worse. A large part of the crash came from firms working with borrowed money. In May 2022 the Terra/Luna stablecoin system collapsed. In June the crypto lender Celsius froze withdrawals and the hedge fund Three Arrows Capital went bust. In November the exchange FTX collapsed. Each time, positions had to be sold by force.
Those who didn't have to sell came through. Anyone who held their bitcoin in self-custody, had no loans against it and could sit out the period was back at the old high by March 2024.
What 2022 doesn't show
2022 was not a full stagflation. US unemployment was around 3.5%, as low as it had been in decades. The economy weakened, but it did not collapse. An important part of stagflation was missing.
It was one year, not a decade. The 1970s lasted ten years with several waves. 2022 shows how bitcoin reacts to the shock, but not how it fares when inflation stays high for years and people lose trust in their money.
The central banks acted hard. In 2022 central banks raised rates quickly and decisively, like Volcker in 1979. The early 1970s were different: rates stayed below inflation for a long time. How bitcoin fares in such a phase, where saving loses money in real terms and the central bank hesitates, we don't know.
The crypto market had its own problems. The failures of Terra, Celsius and FTX had little to do with stagflation. They could have happened at 2% inflation too.
Three scenarios for a next stagflation
Whether and when the next stagflation comes, nobody can predict. These paths are possible:
| Scenario | What happens | What it could mean for bitcoin |
|---|---|---|
| Rate shock like 2022 or 1979 | Central banks raise rates far above inflation, money becomes expensive | Headwind. Risky assets fall, bitcoin included. Declines of over 70% have happened several times. |
| Rates too low for too long like the early 1970s | Inflation stays high, central banks keep rates below it to spare governments and the economy | Saving in an account loses money in real terms. This was the situation in which gold rose the most. It could be similarly favourable for bitcoin, but that is not proven. |
| Mild stagflation | Inflation at 3 to 5%, growth near zero, for a few years | Little pressure in either direction. The price follows other forces such as cycles, inflows and investor mood. |
The 1970s began with rates that were too low and ended with a rate shock. If you hold for the long term, you have to reckon with both.
How to prepare as a holder
The main lesson from 2022 is simple: those who lost most were those who had to sell. Your preparation therefore aims at not having to sell in a bad year.
Build a cash reserve
In a stagflation, the risk of losing your job or earning less rises exactly when bitcoin is low. A reserve of three to twelve months' expenses in your account keeps you from having to sell at the worst moment. The less secure your income, the larger it should be.
No loans against bitcoin
A loan with bitcoin as collateral becomes a trap when the price falls sharply: the lender sells your bitcoin automatically. In a stagflation, loan rates also rise, and the income you would need to add collateral may disappear.
When a loan against bitcoin can still make sense and how to calculate the limits is covered in Bitcoin-Backed Loans: Borrow Instead of Selling.
Keep the savings plan running
When the price falls, the same savings amount buys more sats. Anyone who kept their savings plan going in 2022 bought below $20’000 towards the end of the year. But this only works if the amount stays affordable when prices rise and your job is uncertain. Set it so that you don't have to stop when life gets more expensive.
Only invest long-term money
After the 2021 peak, bitcoin took about 28 months to get back to it. A real stagflation could last longer. Only put money into bitcoin that you won't need for at least four years, preferably longer. What goes on in your head and how to sit out such phases is described in HODL Psychology.
Frequently asked questions
Is bitcoin a hedge against stagflation?
That is not proven. Bitcoin has never lived through a long stagflation. In 2022, with high inflation and rising rates, it fell 77%. Over many years the fixed supply could help it, as it helped gold in the 1970s. In the short term it has so far behaved more like a risky asset.
What is the difference between stagflation and inflation?
Inflation only means that prices rise. In stagflation prices rise while the economy barely grows and unemployment increases. That mix is harder, because central banks cannot fight both at the same time.
How did gold do in the 1970s?
Very well. After the end of the dollar's gold link in 1971, gold rose from $35 to as much as $850 an ounce in January 1980. Afterwards, however, it fell sharply and took 28 years to reach that price again.
Was 2022 a stagflation?
Not quite. Inflation was high and rates rose fast, but unemployment stayed low. 2022 was more of an inflation and interest-rate shock. It shows how bitcoin reacts to expensive money, not how it gets through a decade of stagflation.
Should I sell bitcoin if stagflation looms?
That depends on your situation, not on the headline. If you have a reserve, no loans and a long horizon, you don't need to sell. If you need the money in the next few years, you shouldn't hold it in bitcoin, whatever scenario comes.
Sources
- Federal Reserve History: The Great Inflation
- Federal Reserve History: Oil Shock of 1973–74
- U.S. Bureau of Labor Statistics via FRED: Consumer Price Index CPI-U and Unemployment Rate
- Eurostat: Harmonised Index of Consumer Prices (HICP)
- European Central Bank: Euro reference exchange rates
- Bitcoin prices: the site's daily data
Not financial, legal or tax advice. Models are no guarantee.
The Bitcoin Power Law newsletter
An email when we publish a new article or calculator. Every issue has a one-click unsubscribe link.