Bitcoin’s escape from the trenches didn’t last long. The cryptocurrency fell more than 4% on Friday to $68,500, wiping out gains built over the past three months and casting doubt on whether its bear market was ever really over.
The asset also faces weaker investor appetite, according to crypto analytics provider CryptoQuant. The firm’s demand indicator recorded its weakest reading since December 2023, while Bitcoin exchange-traded funds became net sellers again.
The recent downturn has also extended to other parts of the crypto market. That includes Tether’s USDT, the largest cryptocurrency pegged to the U.S. dollar, whose total value shrank by $7.7 billion over the past two months, according to CryptoQuant, a sign that less cash is available in crypto markets.
This time around, inflation has been the main culprit. Tuesday’s Consumer Price Index report showed prices rose 0.4% in October, more than economists expected. Even stripping out food and energy, inflation ran hotter than forecast. Traders now overwhelmingly expect the Federal Reserve to raise interest rates by a quarter percentage point in December, with some betting on an even bigger increase.
“Because these are non-yielding assets, and we expect inflation to rise… people are chucking stuff like gold and Bitcoin to find… government bonds that are going up, providing you [with] income,” Chris Beauchamp, chief market analyst at financial technology company IG Group, told Fortune.
Bitcoin isn’t alone in its retreat. Gold traded near $3,900 an ounce on Friday, well below its January peak of about $5,600, according to financial data provider Trading Economics. Prices have fallen roughly 5% over the past month and nearly 5% from a year ago.
Bitcoin’s bad year
Friday’s drop dealt a fresh blow to Bitcoin investors, who had only recently found their footing after months of losses. After Bitcoin hit $58,000 in June, optimism returned in August when the U.S. Treasury announced plans to expand its bond buybacks. The announcement helped spark a rally that carried Bitcoin to $86,000 in September. Since then, though, it has been sliding again.
Recent political news has also made Bitcoin’s recovery an uphill battle, though it held its ground until Friday. The midterm elections handed Democrats control of Congress, a setback for a crypto industry that has leaned on Republican allies to advance favorable legislation. Still, Bitcoin initially took the results in stride.
That was largely because investors had seen the outcome coming, according to Stephen Coltman, head of macro at crypto asset manager 21Shares. “The midterm results weren’t a surprise, and they don’t change the regulatory interpretations as they stand today… We at least have some regulatory stability for two years,” he said.
Inflation and politics aren’t the only forces shaping Bitcoin’s outlook. Analysts say the cryptocurrency is also caught up in the AI boom, which is competing for investors’ money while helping keep the economy strong enough for interest rates to stay high.
Heavy borrowing and spending on AI have created what 21Shares calls an “AI black hole,” drawing money toward the sector and away from assets like Bitcoin and gold. But Bitcoin remains “joined at the hip” with tech stocks, according to Beauchamp. That leaves it in an awkward position: It faces competition for investment dollars when enthusiasm for AI runs high, yet can get dragged down when that enthusiasm fades.
The boom also complicates the outlook for interest rates. In Coltman’s view, AI spending is helping prop up an otherwise weak economy, giving the Fed room to keep fighting inflation with higher rates. If rising borrowing costs force AI companies to rein in spending, the economy could weaken enough to push the Fed to change course, potentially giving Bitcoin some breathing room.