Bitcoin (BTC) used to hate inflation. Now it might be the opposite

Bitcoin BTC$80,958.81 continues to rally, defying the typical inflation playbook. It’s raising the question of whether the cryptocurrency has quietly crossed over from risk asset to inflation hedge.

The leading cryptocurrency by market value has risen 19% in just over a month, topping $80,000 on Monday for the first time since January. The rally comes as oil hovers above $100 and Bloomberg’s commodity futures index has jumped to a decade high, pointing to inflation in the pipeline. Meanwhile, U.S. consumer inflation expectations are surging.

In the standard playbook, this combination is considered bearish for bitcoin. Rising inflation means the Federal Reserve is likely to keep interest rates higher for longer, while higher rates mean attractive returns on supposedly safe assets such as U.S. Treasury notes and less incentive to invest in yield-less assets like bitcoin. This logic has worked several times before, most notably in 2022, when the Fed hiked rates aggressively to tame inflation, which partially catalyzed that year’s bitcoin crash.

This time is different

But this time, bitcoin is not following that script. Some analysts are acknowledging the disconnect plainly, raising questions about the durability of the rally. Others say something more fundamental is happening.

“Macro signals remain divided, with commodities pricing supply-side stress while risk assets continue to trade higher. This divergence highlights a growing disconnect across asset classes and raises questions about the durability of the current risk-on environment,” analysts at prominent and long-running exchange Bitfinex said in a report shared with CoinDesk.

Inflation hedge

A different interpretation is gaining traction, suggesting a shift in how BTC is used: from a risk asset to an inflation hedge. And this interpretation is not just circumstantial but backed by renewed inflows into the spot ETFs.

Since March, the 11 U.S.-listed spot bitcoin exchange-traded funds have raised $4.45 billion in investor capital, nearly reversing the massive outflows during the autumn that weighed on the spot price at the time. Most of these inflows are seemingly bullish directional bets rather than the once-popular non-directional arbitrage play, which has not fallen out of investor favor.

“The more interesting shift is happening on the institutional side. Continued inflows into bitcoin ETFs point to a broader change in how hedging is approached. Gold is no longer the default — digital assets are increasingly being considered alongside it, not after it,” Ryan Lee, chief analyst at Bitget Research, said in an email.

Paul Howard, senior director at crypto liquidity provider Wincent, also sees bitcoin as an inflation hedge and has a price target for it. “As both an inflation hedge and a highly liquid store of value, bitcoin possesses several characteristics that could support a 3.5 times increase in price over the next three years,” he said in an email.

The view that BTC is an inflation hedge is no longer confined to crypto circles.

Last week, Paul Tudor Jones, one of the most respected macro traders alive, the man who correctly called and traded the 1987 stock market crash, came out with the most direct endorsement of the bitcoin inflation hedge thesis heard from a Wall Street heavyweight.

“Bitcoin is, unequivocally, the best inflation hedge there is,” Jones said in an interview on the Invest Like the Best podcast. “More than gold.”

His reasoning is structural. Unlike gold, whose supply increases by a couple of per cent each year, bitcoin has a finite supply that can be mined. In a world where central banks have demonstrated a clear willingness to boost the money supply, own the thing they cannot print more of.

Don’t forget stocks

Here is the honest caveat that the bullish inflation hedge narrative needs to reckon with.

Right now, U.S. equities are on a tear, and that is offering positive cues to bitcoin and the broader risk complex, as we noted Monday. In this environment, it is therefore genuinely difficult to draw a definitive conclusion that BTC has evolved into an inflation hedge and that the hedging bid, rather than the risk-on bid, is driving BTC higher.

“After a solid April, BTC has begun May on firm footing, breaking above $80k for the first time since January 31. The move appears aligned with equities, reinforcing a broader trend as BTC’s correlation with US stocks climbing back toward 2023 levels, signaling a renewed linkage with risk assets broadly,” Singapore-based digital assets trading firm QCP Capital said in a market note.

The real test of the inflation hedge narrative comes if and when equities turn lower. If bitcoin holds or rises during an equity sell-off, the narrative gets confirmed. But if it falls alongside equities, the risk asset label will stick.

That test has not arrived yet. Until then, the inflation thesis remains compelling.