Bitcoin’s steep selloff is undercutting the argument made by the digital currency’s proponents that it’s an inflation hedge.
The original cryptocurrency has lost about half of its value since mid-April, fizzling after a spectacular rally that saw it surge above $60,000 from around $7,000 at the start of 2020. It traded Wednesday afternoon at $31,864, and got a small boost after Tesla Inc. boss Elon Musk said he has personal holdings of the cryptocurrency, as does his space company SpaceX.
The timing is ironic.
Bitcoin’s supporters for years have touted it as an inflation hedge like gold, mainly because the bitcoin network has a set limit on the number of units that can be created: 21 million. Their argument hadn’t previously been tested, however, because inflation has largely been under the Federal Reserve’s 2% target since bitcoin’s 2009 launch.
Now for the first time in years, shortages of semiconductors, lumber and workers are putting pressure on consumer prices, sparking worries about inflation. At the same time, governments and central banks have been forced to spend trillions to prop up their economies, potentially sapping the purchasing power of their currencies.
The consumer-price index rose to 5.4% in June, its fastest pace in 13 years. And inflation measures in 49 countries have all been rising since the beginning of the year, according to the Center for Financial Stability, a New York-based nonprofit think tank.
Bitcoin is going in the other direction. The digital currency has fallen in five of the past seven days and is down 7.9% in July, extending its monthslong selloff. It is now up 10% in 2021.
“Bitcoin’s price swings seem to be largely disconnected from macroeconomic fundamentals, including inflation,” said
a professor of trade policy at Cornell University who has written extensively about currencies. “At the moment it is hard to see people buying bitcoin as an inflation hedge.”
Other markets are also bucking traditional patterns during inflationary periods. Gold is down 4.8% this year and 12% from August’s record. Government-bond yields have declined in recent weeks as well, suggesting investors are more concerned about slowing economic growth prospects than a surge in inflation.
Many investors have largely dismissed the gains in inflation, seeing them as skewed by short-term supply disruptions related to the reopening of the economy. Federal Reserve Chairman
and other policy makers have also maintained that they expect such gains to be transitory.
In bitcoin’s case, scarcity itself isn’t a stable source of value, Mr. Prasad said. Bitcoin, in fact, is more sensitive to regulatory changes and tweets from influential users than it is from…