Bitcoin and Stagflation: A Growing Concern?

In his latest report, “2025 Look Ahead. Is it “too late” to enter digital assets?”, Chris Kuiper examines Bitcoin’s evolution in 2024. He describes its transition from being seen as a “growth stock on steroids” to “gold on steroids.” 

Initially, Bitcoin’s price moved in tandem with gold (see Fig. 1). While gold continued its upward climb, Bitcoin remained in a sideways trend. However, Bitcoin regained momentum later in the year, outpacing gold’s growth rate.

Figure 1: Bitcoin vs Gold Price Trends in 2024.

Source: Fidelity Digital Assets

Notably, the recent rally extended beyond Bitcoin and gold to include tech stocks, which posted significant gains. This contradicts the notion of a broad shift away from risk assets. Instead, as Chris Kuiper highlights, the “risk-on” strategy has remained dominant in the market.

What does this mean for 2025? In his report, “2025 Look Ahead: Is it Too Late to Enter Digital Assets?”, Kuiper identifies two primary macroeconomic drivers for Bitcoin: liquidity and inflation expectations. 

One critical factor is the Federal Reserve’s recent move to lower interest rates, a policy that traditionally boosts liquidity. Additionally, the global M2 money supply is expanding, signaling increased monetary flow and availability.

What is M2?

M2 is a monetary aggregate widely used to analyze the composition of a country’s money supply, alongside other aggregates like M0, M1, and M3. These indicators, calculated and published by central banks, are defined by the International Monetary Fund (IMF) but may also vary based on local criteria set by individual countries.

M2 is the most commonly referenced aggregate globally. It includes both cash in circulation and non-cash assets, such as savings and time deposits held by individuals and businesses in the national currency. As a critical component of monetary statistics, M2 provides key insights into the liquidity available within an economy.

In times of financial disruption, central banks often respond with increased liquidity injections—a tool increasingly relied upon to counteract market volatility. 

Such scenarios tend to favor digital assets, as enhanced liquidity can make these alternatives more attractive to investors. Although inflation has decreased from its 40-year highs, it remains above the 2% target.

Historical patterns, particularly from the 1970s and 1980s, reveal that inflation often occurs in waves rather than as a sustained, linear price increase (see Fig. 2). 

Fig. 2: Annual Changes in the Consumer Price Index: 1968-1983 vs 2014-2024.

Source: Fidelity Digital Assets

Central banks often believe they have inflation under control, only to encounter unexpected surges later, experts warn. 

If an economic downturn coincides with persistent high inflation, the world could face stagflation—a challenging scenario where elevated inflation is coupled with stagnant or contracting GDP growth.

Chris Kuiper notes that Bitcoin has yet to be tested in a full-fledged stagflationary environment. Its performance in such conditions will likely hinge on the policy responses of governments and central banks. 

If governments focus on stimulating economic growth through increased public spending or expansive monetary policies, Bitcoin could benefit as a hedge against inflation and economic uncertainty. However, if central banks take a hardline approach to fight inflation by sharply reducing liquidity, Bitcoin may face significant challenges. 

Historical trends, such as the spike in gold prices during the second inflationary wave of the 1970s (see Fig. 3), may provide valuable insights into how Bitcoin could behave under similar economic conditions.

Fig. 3: Gold Price Movement vs. Annual Consumer Price Index (CPI) Changes.

Source: Fidelity Digital Assets

Whether the global economy achieves a “soft landing” or encounters a more critical downturn, Bitcoin could remain a resilient and valuable component of a diversified portfolio.

If inflation persists above the 2% target, Bitcoin is likely to gain further attention from investors seeking protection against inflation. Additionally, during a potential recession, fiscal and monetary stimuli could bolster Bitcoin’s appeal as a hedge and alternative asset.

The most significant risk to Bitcoin’s growth would be a sharp reduction in government spending and monetary supply. However, given the prevailing environment of substantial budget deficits and high national debt levels, such a scenario appears improbable.