Key economic data released Thursday indicate that the U.S. economy may be on the brink of stagflation, a challenging mix of sluggish growth, a weakening labor market, and rising prices.
Despite these concerns, crypto market participants remain optimistic, focusing instead on anticipated Federal Reserve rate cuts and signals from traditional markets as drivers for higher crypto valuations.
“The underlying driver of this market cycle is a monetary tailwind, and that remains intact, despite the risk of stagflation. Bitcoin, and crypto more broadly, are absorbing capital as a hedge against fiat dilution and long-term fiscal instability. They aren’t functioning solely as a bet on risk, like we’ve seen in past cycles,” Shane Molidor, founder of Forgd, a crypto advisory platform, told CoinDesk.
Data released Thursday showed that consumer prices rose 0.4% month-on-month in August, driving the annualized inflation rate to 2.9% — the highest since January. That was up from 2.7% in July. Meanwhile, first-time applications for unemployment benefits surged last week to their highest level in four years. Early this week, the BLS announced a record downward revision to jobs created during the year ended March 2025.
Despite the supposed stagflationary data, the S&P 500 surged to new all-time highs, while the dollar index fell by 0.5% to 97.50, as traders focused on anticipated Fed rate cuts and looked beyond inflation worries.
Bitcoin (BTC), the leading cryptocurrency by market value, briefly topped $116,000, building on its recent bullish technical breakout. As of the time of writing, BTC was trading at $115,244. Altcoins such as Solans’s SOL (SOL), LINK (LINK), Dogecoin (DOGE) posted bigger gains on a 24-hour basis.
Traders widely expect the Fed to cut rates by 25 basis points to 4% on Sept. 17, with additional reductions anticipated through the end of the year. This outlook remains largely unchanged despite Thursday’s disappointing economic data, signaling continued confidence that the Fed will prioritize supporting the labor market, looking past concerns of sticky inflation.
Le Shi, managing director of crypto market maker Auros, made an interesting observation that the Magnificent 7 coins – large-cap technology stocks known for their market dominance and strong growth potential – appear relatively insulated from stagflation fears. The continued strength in the so-called Mag 7 coins, which have planned billions in capital expenditures and research and development (R&D) expenditures on AI, could grease the crypto bull sentiment.
“On stagflation being a looming threat to the current bull run, the Mag 7 and the S&P 493 have significantly decoupled of late. As a result, the AI narrative – arguably the largest theme in this bull run so far – appears more insulated from stagflation fears because of this,” Shi added.
Sam Gaer, chief investment officer of Monarq Asset Management’s Directional Fund, stated that the risk-reward ratio in the cryptocurrency market remains attractive.
“Traders appear to be getting an ‘all clear’ for a rate cut next week after CPI and labor data delivered no shocks or negative surprises. With these releases behind us — and after yesterday’s softer-than-expected PPI print — we believe risk/reward continues to favor the upside,”
Gaer explained that in a potential stagflationary scenario, the Fed may be forced to prioritize price stability over employment and raise rates, which could lead to a temporary risk aversion or sell-off in growth and liquidity-sensitive assets such as stocks and cryptocurrencies. However, this would only strengthen the long-term crypto bull case.
“Over the medium to long term, however, this dynamic would strengthen the structural bull case for Bitcoin and crypto more broadly, as investors seek scarce, non-sovereign assets to hedge persistent fiat debasement,” Gaer said, adding that the probability of a prolonged stagflationary regime is low.
Markus Thielen, founder of 10x Research, said the disinflation trend is likely to resume in the coming months.
“Our inflation model and leading indicators point to falling inflation, a backdrop that gives risk assets room to run. A 25bp cut with guidance for more would calm markets, not spook them, and set the stage for a bullish finish to the year,” Thielen told CoinDesk.
As bitcoin and other major cryptocurrencies reach new all-time highs, a select group of altcoins is poised to experience significant rallies. Notably, there is a growing consensus about solana’s (SOL) price prospects.
“We have seen strong demand for SOL during the past 2 weeks. SOLBTC is trading at its highest level in seven months and pushing up against the psychological 0.002 level, with strong upward momentum continuing from early August. Rotation into SOL is naturally occurring as several SOL DATs are coming online, with over $1B raised (or being raised) into various SOL vehicles,” Gaer explained.
The other favorites among industry participants are the DeFi protocol Ethena’s ENA token and its synthetic dollar, USDe, as well as decentralised exchange Hyperliquid’s HYPE token.
“Younger investors aren’t interested in slow 7% annualized returns. Instead they’re turning to perpetuals markets and trading with leverage, making riskier bets with greater upside potential. Hyperliquid is built for exactly that type of user: it’s permissionless, always-on, and increasingly positioned as the go-to for high-beta plays, especially among younger investors who view volatility as a feature, not a bug,” Molidor said explaining the bullish case for Hyperliquid’s HYPE token.
He pointed out the yield advantage Ethena has as the Fed cuts rates, driving down the return on traditional fixed-income instruments and dollar equivalents, such as stablecoins.
Think of it like the popular yield-differential strategy in foreign exchange markets, where a country’s currency tends to strengthen when its bond yields rise relative to others, attracting capital flows due to higher returns.
“As the Fed cuts rates and short-term T-Bill yields fall, traditional stablecoins like Circle’s become less profitable and Ethena’s tokenized basis trade becomes more lucrative. It’s a rare circumstance where Ethena’s stablecoin yields go up as Fed rates come down, which could make the token particularly attractive in the next phase of the market cycle,” he noted.
Auros pointed to CRO along with SOL, BNB and HYPE as key tokens to watch out for during the next upswing in the crypto market.
Read more: Rising Jobless Claims Eclipse Inflation Data as Recession Fears Resurface
