Bitcoin price crashes below $40,000 as it fails to live up to promise as inflation hedge
Bitcoin price has fallen sharply (REUTERS)
Bitcoin has dipped below the $40,000 mark amid a wider tech sell-off and predictions of a looming interest rate hike, in a blow to investors hopes that it could act as a hedge against inflation.
Bitcoin has fallen from its previous all-time high of over $68,000, reached just two months ago, to trade at $39,216.32 on Friday.
According to price-tracker Coingecko, the entire cryptocurrency market has fallen over 7% in the last 24 hours, with bitcoin slumping 8% in the week.
Victoria Scholar at Interactive Investors said: “Bitcoin has broken below critical support at $40,000 to reach the weakest level since August, retreating more than 40% from the November high.
“The notoriously volatile asset has now retraced more than 75% of its gains since the summer with the potential for risk-off sentiment in equities to continue to weigh on cryptos.”
The slump is a blow to the hopes of many investors that bitcoin would provide a hedge against inflation. The slump coincides with inflation in the UK hitting a 30 year high of 5.4%, leading to a general expectation that the Bank of England will raise interest rates again next month.
Bitcoin has a finite supply of 21 million coins, which proponents argue means it should hold its value. It is regularly publicised as ‘digital gold’ and a more efficient hedge against inflation when compared to traditional stores of value.
Nicholas Cawley, a strategist at DailyFX, said: “The limited supply of Bitcoin is seen by many as a hedge against inflation, especially after the global money presses kept on printing.”
Hedge fund billionaire Paul Tudor Jones last year said bitcoin is “winning the race against gold” and a better store of value than its traditional counterpart.
Hopes that it would hold its value in times of market turmoil have failed to materialise. The world’s premier cryptocurrency is now nose-diving faster than the pound and the dollar.
Cawley said: “What we have seen over the past few weeks is Bitcoin acting as a risk-proxy, with the price of Bitcoin falling with other risk assets as the Fed readies itself to start tightening monetary policy by hiking interest rates.
“In the current case, Bitcoin is not acting as an inflation hedge as higher inflation leads to expectations of higher interest rates and a lower Bitcoin price.”
Bitcoin has still performed strongly over the last 12 months, rising by more than 35% since January 2021. The world’s biggest cryptocurrency has significantly outperformed gold, which has risen by only 4.93% over the same period.