Bitcoin’s Decline: An Inflation Hedge Unraveled
Bitcoin has seen a significant drop of 36% over the past year, dipping below $70,000 this week. This decline raises questions about some of the previously touted arguments that helped cryptocurrencies gain traction in the financial world.
Investors are pulling funds from Bitcoin ETFs as geopolitical tensions drive people back to traditional safe havens. Inflation fears are re-emerging, but rather than benefiting from these pressures, Bitcoin’s value is sliding. Some of its most notable investment claims seem to be fraying at the edges.
One of the biggest tests for Bitcoin has been its perceived role as a safeguard against inflation. With inflation potentially rising due to increased energy demand linked to the U.S. artificial intelligence boom, one might assume Bitcoin would shine. Yet, it’s actually moving in the opposite direction.
For those holding Bitcoin, the experience has been painful, leading to an inflation-adjusted loss of around 39%. This adds to the ongoing issue where Bitcoin struggles to fulfill its promise of protection against price spikes and declining purchasing power.
This belief hinges on the fixed supply of Bitcoin—unlike fiat currencies, which can be printed by central banks, only 21 million Bitcoins will ever exist. Advocates have long argued that as inflation rises, this scarcity would make Bitcoin a digital version of gold.
However, this theory often falters under scrutiny. Cleveland Fed President Beth Hammack recently highlighted the rising risks of inflation, stating that policymakers may need to act if price pressures continue. Such comments fuel concerns that the Federal Reserve’s battle against inflation is ongoing, while many investors regard Bitcoin more as a risky asset than a true hedge against rising costs.
“If you’re considering Bitcoin as a short-term inflation shield, now might be a good time for a reassessment,” warns Cam Harvey, director of research at Research Affiliates and a professor at Duke University. “The randomness involved is considerable and can lead to disappointment.”
With consumers already feeling the strain of rising oil and gas prices, the personal consumption expenditure index saw a 3.8% year-on-year increase last month, marking the highest rate since 2023. Meanwhile, Bitcoin has not kept pace with the recent rally in risk assets. While stocks are reaching record highs, Bitcoin has dropped about 14%, currently trading around $67,500—a far cry from its peak of $126,000 last October. This inability to hold value amid high prices has frustrated investors like Mark Cuban, who recently sold most of his Bitcoin holdings after realizing it wasn’t functioning as a reliable store of value.
“I know some folks might be upset to hear this, but I think Bitcoin has lost its way,” Cuban remarked on a recent podcast. He had expected it to rise following the start of the Iran war, but while Bitcoin fell, gold surged instead. “It didn’t act as the hedge I anticipated, which was really disappointing.”
This sentiment seems to be widespread. Recent data from Coinglass shows that liquidations in the crypto market amounted to around $1.5 billion within the last 24 hours, with Bitcoin leading the charge. The last time such a significant amount of liquidations occurred was back in early February, when prices hit recent lows.
On a different note, some cryptocurrency commentators argue that there are many ETFs centered around Bitcoin and its various derivatives. They note that while only 21 million coins exist, various contracts and derivatives are created to be traded indefinitely. Nonetheless, the narrative surrounding Bitcoin’s limited supply is called into question.
“Has it ever truly been an inflation hedge?” asks Steve Sosnick, chief strategist at Interactive Brokers. “Without a convincing use case for Bitcoin beyond speculation or being a store of value, its relatively fixed supply is less compelling during times of rising demand compared to stagnant or declining demand.”
