Bitcoin traded down 8% on Tuesday, as it continued to wrestle with the Chinese government’s increasingly hostile measures to cryptocurrencies and the prospect of a change in monetary policy in the United States.

Having reached a new all-time high of $64,788 in mid-April, the world’s first and largest cryptocurrency has more than halved in value, dragged down by criticism of the environmental impact of crypto mining and the Chinese Communist Party’s vow to “crack down” on digital trading.

In the latest example of China’s tightening measures, Weibo, one of the country’s most popular social media companies, suspended a swathe of cryptocurrency-related accounts. The firm stated that such accounts have been reported for violating national laws and regulations or its own terms and conditions.

Bitcoin had been given a vote of confidence over the weekend when the president of El Salvador, Nayib Bukele, announced his intention to make the cryptocurrency legal tender in the Latin American nation alongside the US dollar.

The move would constitute a significant milestone in the history of the decentralised currency that, by its nature, is outside of the control of any one state or central bank.

Such characteristics prompted criticism from former US president Donald Trump who, reacting to El Salvador’s potential move on Fox Business, dubbed Bitcoin a “scam”. Arguing that the “currency of the world should be the dollar”, Mr Trump called for substantial regulation of Bitcoin which he argued “takes the edge off the dollar”.

Mounting inflation anxiety

Bitcoin’s recent slump from record highs has occurred despite fears of runaway inflation accelerating around the world.

Since the start of the COVID-19 crisis in March of last year, governments and central banks across the globe have introduced record levels of stimulus and low interest rates. Indeed, a third of all US dollars in existence have been printed in the wake of the health crisis.

The recent spectre of a tapering of the Federal Reserve’s bond-buying programme has begun to weigh on market sentiment.

Champions of Bitcoin have long touted its potential as an inflation hedge and possible store of value. With a finite supply and in-built deflationary mining reward structure, the crypto has been characterised by some as a digital equivalent to gold. Critics have countered such a comparison by pointing to Bitcoin’s numerous 50% falls in value.

Bitcoin may soon be faced with the definitive test of its potential as an inflation-buster. On Monday, Deutsche Bank published a report stating that the US could be set to experience one of the worst inflationary periods of its history. The report argued that should the Federal Reserve have to intervene following “consumer-driven inflation”, this could “create a significant recession and set off a chain of financial distress around the world”.

It added:

“A lack of preparation for the return of inflation is concerning. Even if some inflation today is transitory, it may feed into expectations as in the 1970s. Even if only embedded for a few months, these expectations may be difficult to contain with stimulus so great.”

By mid-morning, Bitcoin traded down 4% at $32,915, its lowest level since late January.

Further reading: Bitcoin treads water despite El Salvador endorsement

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