Bitcoin The continued rally goes against typical inflationary strategies. This raises the question of whether cryptocurrencies have quietly transitioned from risk assets to inflation hedges.
The leading cryptocurrency by market capitalization has gained 19% in just over a month, surpassing $80,000 on Monday for the first time since January. The rebound comes as oil prices hover above $100 and the Bloomberg Commodity Futures Index has jumped to a decade high, pointing to inflation to come. Meanwhile, U.S. consumer inflation expectations are soaring.
In standard strategies, this combination is considered negative for Bitcoin. Rising inflation means the Fed is likely to keep interest rates higher for longer, and higher rates mean attractive returns on so-called safe assets like U.S. Treasuries and less incentive to invest in non-yielding assets like Bitcoin. This logic has worked many times before, most notably in 2022, when the Federal Reserve raised interest rates sharply to curb inflation, which partly catalyzed the Bitcoin crash that year.
This time is different
But this time, Bitcoin didn’t follow this playbook. Some analysts have explicitly acknowledged the disconnect, raising questions about whether the rally can be sustained. Others say something more fundamental is going on.
Analysts at long-standing exchange Bitfinex said in a report shared with CoinDesk, “Macro signals remain divergent, with commodity pricing putting pressure on the supply side, while risk assets continue to move higher. This divergence highlights the growing disconnect between different asset classes and raises questions about the durability of the current risk environment.”
inflation hedge
A different explanation is gaining traction, suggesting a shift in how Bitcoin is being used: from a risk asset to an inflation hedge. This explanation is not only indirect, but is supported by renewed inflows into spot ETFs.
Eleven U.S.-listed spot Bitcoin exchange-traded funds have raised $4.45 billion in investor money since March, all but reversing the massive outflows that had weighed on spot prices during the fall. Most of these inflows are seemingly bullish directional bets, rather than the once-popular non-directional arbitrage play, which has not lost favor with investors.
Ryan Lee, chief analyst at Bitget Research, said in an email: “The more interesting shift is on the institutional side. Continued inflows into Bitcoin ETFs indicate a broader change in hedging approaches. Gold is no longer the default choice – digital assets are increasingly considered alongside it, rather than behind it.”
Paul Howard, senior director at cryptocurrency liquidity provider Wincent, also views Bitcoin as an inflation hedge and has set a price target for it. “As an inflation hedge and highly liquid store of value, Bitcoin has multiple properties that could support a 3.5x price increase over the next three years,” he said in an email.
The idea that Bitcoin is an inflation hedge is no longer limited to cryptocurrency circles.
Last week, Paul Tudor Jones, one of today’s most respected macro traders who correctly predicted and traded the 1987 stock market crash, heard the most direct endorsement of Bitcoin’s inflation hedging theory from a Wall Street heavyweight.
“Bitcoin is, without a doubt, the best inflation hedge,” Jones told the Invest Like the Best podcast. “More than gold.”
His reasoning is structural. Unlike gold, whose supply increases by a few percentage points each year, Bitcoin’s mineable supply is limited. In a world where central banks have made it clear they are willing to increase the money supply, owning more of what they can’t do is printing more.
Don’t forget stocks
This is an honest warning to consider for the bullish inflation hedge narrative.
As we noted on Monday, U.S. stocks are currently rising, providing positive clues for Bitcoin and broader risks. Therefore, in this environment, it is indeed difficult to draw a clear conclusion that Bitcoin has evolved into an inflation hedge and that it is hedge buying, rather than risk buying, that is driving Bitcoin higher.
Singapore-based digital asset trading firm QCP Capital said in a market report, “After a strong performance in April, BTC has gained a foothold in May, surpassing $80,000 for the first time since January 31. This trend appears to be consistent with the stock market, with BTC’s correlation with the US stock market returning to 2023 levels, reinforcing the broader trend, indicating the re-establishment of broad links with risk assets.”
The real test of the inflation hedge narrative will come when stocks move lower. This statement would be borne out if Bitcoin held steady or rose during the stock sell-off. But if it were juxtaposed with stocks, the risk asset label would be affixed.
That test has yet to come. Until then, the inflation theory remains compelling.
