Inflation is up, so why isn’t the price of Bitcoin?

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In ear­ly May, MicroS­trat­e­gy CEO Michael Say­lor took to Twit­ter to, once again, pro­claim his trust in Bit­coin. “Bit­coin is the best hedge against infla­tion,” he tweet­ed, cit­ing evi­dence that Bitcoin’s price has risen over time since his own com­pa­ny bought a bil­lion dol­lar stake in the dig­i­tal cur­ren­cy in August 2020.

But Saylor’s words have rung hol­low in the weeks since then, as Bit­coin has crashed along­side so many oth­er facets of the U.S. economy.

For years, cryp­tocur­ren­cy advo­cates have tout­ed Bit­coin as a hedge against the inflat­ing val­ue of fiat cur­ren­cies. His­tor­i­cal­ly, Bit­coin has even seen pop­u­lar adop­tion in for­eign coun­tries expe­ri­enc­ing wide­spread eco­nom­ic insta­bil­i­ty like El Sal­vador, Lebanon, and Venezuela.

But with infla­tion surg­ing to its high­est lev­el since 1982 every­thing from gas to gro­ceries is more expen­sive than it’s been in decades. And as the U.S. dol­lar declines in val­ue, invest­ment in Bit­coin has expe­ri­enced a steep dropoff: For weeks, the cryp­tocur­ren­cy has con­sis­tent­ly hov­ered around $20,000, a lofty plunge from its his­toric high of $68,000 just sev­en months ago. (It even plunged to $17,592 at one point over the week­end, its low­est point since Decem­ber 2020.)

Bit­coin isn’t soar­ing dur­ing the cur­rent peri­od of grow­ing infla­tion shows that it still has a long way to go before it catch­es up with the vision of its top advo­cates, even despite wide­spread insti­tu­tion­al invest­ment. The real­i­ty is that, for the aver­age retail investor, Bit­coin is still a high­ly spec­u­la­tive invest­ment pro­vid­ing lit­tle val­ue in the real world.

“When infla­tion goes up, there are oth­er things that are chang­ing, and Bit­coin is not resilient to all [this change],” said Itay Gold­stein, a pro­fes­sor of eco­nom­ics and finance at Whar­ton School of the Uni­ver­si­ty of Penn­syl­va­nia. Cou­pled with infla­tion is the fall of the finan­cial mar­kets which “is bring­ing down Bit­coin as well,” he continued.

Beyond Bit­coin, cryp­tocur­ren­cy at large has been plagued by tur­moil in recent weeks. In ear­ly June, the con­tro­ver­sial cryp­tocur­ren­cy lend­ing firm Cel­sius froze as much as $8 bil­lion worth of trans­ac­tions due to what the com­pa­ny described as “extreme mar­ket con­di­tions.” The move has sparked a reg­u­la­to­ry inves­ti­ga­tion that could lead to a wider mar­ket crack­down when it comes to fed­er­al reg­u­la­tion regard­ing cryp­tocur­ren­cy investment. 

The uncer­tain eco­nom­ic fore­cast has affect­ed top cryp­tocur­ren­cy com­pa­nies, many of which are brac­ing for an upcom­ing “cryp­to win­ter.” Both Coin­base and Gem­i­ni laid off employ­ees in mid-June, with Coin­base CEO Bri­an Arm­strong writ­ing in a blog post that “eco­nom­ic con­di­tions are chang­ing rapid­ly” into what appears to be an impend­ing reces­sion, which could in turn into anoth­er cryp­to winter.

Not only has this defen­sive posi­tion had a chill­ing effect on the cryp­tocur­ren­cy mar­ket at large, but it’s served as an indi­ca­tion that Bit­coin is sub­ject to the rules of bear and bull markets. 

Bit­coin is often com­pared to gold because of the lim­it­ed amount that can be pro­duced, but in real­i­ty, it has more close­ly par­al­leled the per­for­mance of tech stocks. (In fact,gold has been out­per­form­ing Bit­coin in terms of dol­lar invest­ment in the past year.)

Mon­ey sapped from the finan­cial mar­kets has a big effect on Bit­coin , said Gold­stein. “A lot of things that were keep­ing finan­cial mar­kets up were also help­ing cryp­tocur­ren­cies,” he said. “Peo­ple put mon­ey into cryp­tocur­ren­cies as spec­u­la­tion, and these are the same peo­ple spec­u­lat­ing on stocks. When the mood changes, they’re becom­ing more pessimistic.” 

Today, Bit­coin still func­tions like a high risk invest­ment, espe­cial­ly in times of eco­nom­ic tur­moil. More than any oth­er fiat cur­ren­cy, Bit­coin cru­cial­ly depends on investor sen­ti­ment for its val­ue: the more peo­ple who believe in it and buy in, the high­er the price, and vice versa.

Because its val­ue is so inex­tri­ca­bly linked to investor sen­ti­ment, it’s still a poor infla­tion hedge, espe­cial­ly dur­ing peri­ods of eco­nom­ic tur­moil. A shaky eco­nom­ic future means that few­er peo­ple are less inclined to dump their sav­ings in risky invest­ments, even if those same invest­ments might some­day counter a swift­ly inflat­ing fiat currency.



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