Bitcoin has tumbled 36% over the past year and recently slipped below the $70,000 mark, extending a downturn that is raising fresh questions about its ability to protect investors from inflation. The decline has coincided with investor withdrawals from Bitcoin ETFs. Rising geopolitical uncertainty has boosted demand for traditional safe-haven assets, and renewed inflation concerns.
While Bitcoin has often been touted as a hedge against inflation and market turbulence, its recent weakness is challenging that narrative. Instead of benefiting from these developments, the cryptocurrency has continued to slide, casting doubt on some of its most widely cited investment merits, per Bloomberg, as quoted on Yahoo Finance.
iShares Bitcoin Trust ETF IBIT has slumped 27.4% so far this year SPDR Gold Trust GLD has added about 2.4% so far this year and Invesco DB US Dollar Index Bullish Fund UUP has advanced about 2.8% in the year-to-date frame.
Inflation-Hedge Thesis Flops
Growing electricity demand driven by the U.S. artificial intelligence (AI) boom has increased concerns about higher energy costs and persistent inflationary pressures. Despite these worries, Bitcoin has failed to attract investors seeking inflation protection and has instead moved lower.
Over the past year, the cryptocurrency has delivered an inflation-adjusted loss of roughly 39%, adding to a history of periods when it struggled to preserve purchasing power during inflationary environments, per the above-mentioned source.
Scarcity Alone Hasn't Guaranteed Protection
Bitcoin's inflation-hedge argument is largely based on its limited supply. Unlike traditional currencies that can be expanded by central banks, Bitcoin's supply is capped at 21 million tokens. Supporters have long argued that this scarcity should make it a digital alternative to gold during periods of rising prices. However, real-world performance has often failed to match that theory.
Rising Inflation Concerns Add Pressure
Inflationary pressures remain evident across the economy. Rising oil and gasoline prices have increased costs for consumers, while the Personal Consumption Expenditures (PCE) index rose 3.8% year over year last month, its highest level since 2023. Core PCE, which excludes food and energy prices, climbed 3.3%.
Concerns about inflation intensified after Cleveland Federal Reserve President Beth Hammack warned that policymakers may need to respond if recent price pressures continue, per the above-mentioned Bloomberg source. Her comments reinforced fears that the Federal Reserve's battle against inflation may not yet be over. The Fed may even hike rates this year.
Lagging Even as Risk Assets Rally
Bitcoin's recent weakness stands out because it has occurred during a broader rally in risk assets. While U.S. equities have reached a series of record highs over the past month, Bitcoin has fallen roughly 14%, trading near $67,500. Valuation of Bitcoin is also tough as unlike stocks, Bitcoin does not generate earnings, cash flows or dividends that can be used to calculate intrinsic value. Unlike commodities, Bitcoin is not associated with real-life productive activity. Unlike fiat currencie, Bitcoin is not backed by central banks.
Profit-Taking After a Massive Rally
Bitcoin surged to record highs earlier, reaching around $126,000 in October. Some investors are locking in gains after the strong run-up, contributing to the recent pullback.
High Volatility & Lack of Regulation Hit Bitcoin Hard?
Bitcoin continues to trade more like a high-risk asset than an inflation hedge. The asset is highly volatile in nature. When uncertainty rises like the current scenario of the Iran war, investors often reduce exposure to volatile assets.
Bitcoin has long been in a questionable position due to a lack of regulation. A stronger regulatory framework is likely needed to maintain persistent investor confidence in Bitcoin.
Further Slump Possible?
Possible. In 2013, Bitcoin surged to new highs before collapsing more than 80%. In 2017, the cryptocurrency reached nearly $20,000 before crashing to around $3,000 during the following bear market, a slump of about 84%. In 2021, Bitcoin hit $69,000 before falling to nearly $15,000 in 2022, erasing more than 75% of its value, per Binance.com.
Popular Inverse Bitcoin ETFs in Focus
Amid times of uncertainty, investors can play inverse Bitcoin ETFs like ProShares UltraShort Bitcoin ETF (SBIT), T-Rex 2X Inverse Bitcoin Daily Target ETF (BTCZ) and BetaPro Inverse Bitcoin ETF (BITI).
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This article originally published on Zacks Investment Research (zacks.com).