Bitcoin is in recovery mode on Wednesday amid mounting inflation concerns and hopes for mass adoption after El Salvador’s parliament approved the cryptocurrency as legal tender.
The cryptocurrency was changing hands near $34,000 at press time, having picked up from a bid near $31,000 late Tuesday. That was the lowest level since May 23, according to CoinDesk 20 data.
Data released by China early today showed the producer price index (PPI), also known as factory-gate inflation, rose 9% last month, the biggest year-over-year increase since September 2008.
China’s PPI typically adds to inflationary pressures worldwide because the country is a major buyer and supplier globally. “Rising costs everywhere, in particular in China, will be adding to global inflationary pressures,” Dariusz Kowalczyk, an economist at Crédit Agricole, told the Financial Times. “I think we are going to live with higher inflation globally, and what’s happening in China will contribute to that.”
That’s bullish for bitcoin, which is widely considered an inflation hedge because the pace of expansion of its supply is reduced by half every four years.
However, big gains may remain elusive for some time because of concerns that policymakers across the globe might increase interest rates or scale back liquidity-boosting asset purchase programs to contain inflation, a process known as tapering. Monetary tightening tends to dilute the appeal of the store of value assets like bitcoin and gold.
China is already sucking out liquidity from the system, as noted by Caixin Global. Meanwhile, the U.S. Federal Reserve’s easy monetary policy has come under fire in recent weeks, with many experts arguing that it is not appropriate amid concerns about rising inflation.
“Concerns about the current policy stance of the Fed started with a few and is now turning into an avalanche of former central bank officials, economists, and market participants – and rightly so,” Mohamed El-Erian, chief economic adviser for the German financial firm Allianz, tweeted.
Taper talk may escalate if the U.S. consumer price index, scheduled for release on Thursday, exceeds expectations. These concerns are here to stay, as Messari analyst Mira Christanto recently noted, and may keep the market from cheering other positive developments like El Salvador’s bitcoin adoption.
El Salvador’s parliament approved bitcoin as legal tender early Wednesday, mandating all businesses to accept bitcoin for goods and services. The move has raised hopes for widespread sovereign adoption.
Other nations, however, may choose to see how things pan out in the Latin American country before following its lead.