What Would Deglobalization Mean for Bitcoin’s Price?

May 9, 2022
3 min read

After Russia's conflict with Ukraine, "deglobalization" has become a hot topic in economic and geopolitical discourse. According to crypto specialists, this tendency might have a significant impact on the Bitcoin (BTC) market.

After the collapse of the integrated system developed since the dissolution of the Soviet Union in 1991. Economists are concerned that, at a time when US inflation has hit a four-year high, certain goods and services will become more expensive regionally.

Some investors view the largest cryptocurrency by market value as a hedge against inflation, and deglobalization is a new reason to invest in bitcoin.

What is Deglobalization?

In recent decades, the globalization trend has ushered in an era of governments and businesses favouring open trade and increased labour outsourcing. "Comparative advantage" is a related economic concept that states that a country can manufacture goods and services at a reduced cost compared to its trading counterparts.

As a result, people around the world can save a lot of money on imports.

This trend, however, appears to have shifted recently, prompting some analysts to predict a new period of deglobalization. The trend began with the escalation of the US-China trade war, intensified with the global coronavirus pandemic, and recently hit a new high with the Russia-Ukraine conflict.

Global supply chains have been affected, exports have been stifled in some circumstances, and Russia is now cut off from the dollar-dominated global payments system as a result of US financial sanctions.

As Russian and Ukrainian exports decline, including oil, food, fertilizer, and other commodities, the global economy will suffer. The invasion of Ukraine is regarded by many as heralding the country's withdrawal from the global financial system. The Russian leaders were well aware that we would impose harsh penalties.

What Would be the Economic Impact of Deglobalization?

If global trade in various goods and commodities is further disrupted, end-product prices are expected to rise, contributing to inflation.

Erica Groshen, a former Federal Reserve Bank of New York researcher who is now a senior economics adviser at Cornell University, said that Russia's invasion of Ukraine is causing shortages of oil and gas, wheat, nickel, neon, and a variety of other goods and services. "Such shortages lead to price increases, and we're still dealing with supply challenges that were from the pandemic."

According to Groshen, deglobalization also increases uncertainty, which has a lower influence on economic activity.

The IMF's first deputy managing director, Gita Gopinath, said, "Even in this scenario, the dollar will remain the major global currency, but fragmentation on a smaller scale is certainly possible." "Some countries are already doing this by renegotiating their trade terms in their own currencies."

As spending on goods and services increased, US Trade Representative Katherine Tai told The Wall Street Journal on March 30 that "unfriendly" economies must be shut down as the US focuses on reviving domestic manufacturing.

The problem we face today, two years after [COVID-19] and the Russian invasion of Ukraine, is that this version of globalization we live in has not brought us to a place where we feel safer. The supply chain and our reliance on our partners are things we cannot depend on.

While reliance on Russian energy is in focus, As Larry Fink, creator of BlackRock (BLK), the world's largest asset manager, wrote in his annual investor letter, "businesses and governments will also be looking at their dependence on other countries in the world."

What Would be the Impact on Bitcoin's Price?

Analysts predict bitcoin will serve as a hedge against inflation, similar to gold. Hence, this currently inflationary economic environment will be a testing ground for bitcoin.

In one sense, bitcoin's fixed supply might cause increased consumer costs, but when reversed, any rise in costs indicates a fall in the dollar's purchasing power. Since the Federal Reserve could print more dollars at any time, some investors claim that bitcoin is "harder" money than the dollar.

On the other hand, the Feds may tighten monetary policy to combat inflation, which might stifle economic development and put downward pressure on stock prices, and bitcoin has recently been unusually connected with stocks. The last time inflation in the US was this high was in the early 1980s, when the Federal Reserve, then led by Paul Volcker, hiked the benchmark interest rate to about 20%.

"How bitcoin's price functions in an inflationary environment have yet to be determined," said Garrick Hileman, a blockchain technology researcher at the London School of Economics and Political Science. "Unlike gold, we don't have thousands of years of history to look back on." This is the first time bitcoin has seen a broad inflationary period. "

Wrapping Up

Governments all across the world are attempting to figure out how crypto will affect economies in the long run. In short, Bitcoin has been a lightning rod for debate since its inception. While it has the potential to decentralize and disrupt existing economic infrastructure, it also has the ability to instil distrust and encourage negative behaviour. Deglobalization will only improve Bitcoin's actual operations as well as its market worth.