Bitcoin's Inflation-Hedging Potential Erodes as Price Falls Below $70,000

Bitcoin's Inflation Hedge Argument Undermined by Decline

Bitcoin has fallen 36% over the past year and slipped below $70,000 this week, extending a retreat that is undermining several of the arguments that helped carry the cryptocurrency into the financial mainstream. The decline comes as investors pull money from Bitcoin ETFs, geopolitical tensions drive demand for traditional havens and inflation concerns re-emerge. Yet rather than benefiting from those pressures, Bitcoin has trended lower, leaving some of its most prominent investment claims looking increasingly strained.

The world's largest cryptocurrency has left holders with an inflation-adjusted loss of about 39%. This performance is adding to a long record of periods in which Bitcoin has struggled to deliver on one of its most enduring promises: protection against rising prices and the erosion of purchasing power. The argument that Bitcoin's fixed supply would make it a digital equivalent of gold when inflation accelerated has often struggled when put to the test. Now, with a surge in electricity demand from the US artificial-intelligence boom straining power grids and feeding concerns about higher energy costs, investors are once again confronting the prospect of more persistent inflation.

Cleveland Fed President Beth Hammack on Tuesday became the latest policymaker to warn that inflation risks are rising, saying officials may soon need to act if recent price pressures persist. Her comments added to growing concerns that the Federal Reserve's inflation fight may not be over, just as investors continue to treat Bitcoin more like a risk asset than a hedge against higher prices.

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Consumers are facing increasing cost pressures, with rising oil and gas prices pinching their pocketbooks further. An index of personal consumption expenditures last month rose 3.8% from a year earlier, the most since 2023, while a reading that excludes the volatile food and energy components was up 3.3%. In recent weeks, Bitcoin has even failed to keep up with a broader rally in risk assets. As stocks have hit a string of record highs over the past month, Bitcoin has lost some 14% to trade around $67,100, way off its $126,000 all-time high reached in October.

The disappointment appears to be spreading. Liquidations in digital assets have reached $1.2 billion over the last 24 hours, with Bitcoin leading the way. The crypto market has not seen this amount of liquidations since early February. Crypto critics have pointed out that variants on Bitcoin, such as the numerous ETFs that have been built around the token, as well as derivatives and the derivatives built on top of derivatives, belie the argument that its supply is limited.

Read also: Bitcoin Falls Below $71,000 as Market Sees Widespread Liquidation and Heightened Geopolitical Risk