But there’s also a more fundamental issue: People who touted cryptocurrencies as a hedge against fiat-currency inflation — sort of a digital equivalent of gold — fundamentally misunderstood how fiat currency systems work, and also, for what it’s worth, misunderstand what has historically driven the price of gold. It was, in fact, predictable that an upsurge in inflation would drive the price of Bitcoin down — although maybe not that it would produce such an epic crash.
The key point to understand is that while the dollar is indeed a fiat currency — that is, the authorities can issue more dollars at will, without the need to back those additional dollars with some kind of collateral — America isn’t Venezuela or the Weimar Republic, a nation that prints money to pay the government’s bills. Our money supply is a policy tool used by the Federal Reserve to help keep prices fairly stable — actually, rising around 2 percent a year — while avoiding recessions. Sometimes the Fed gets it wrong, as it did over the past year, when it (and I) failed to see the inflation surge coming. But when it does, it tries to correct the mistake.
What this means, in turn, is that an inflationary outbreak doesn’t presage a spiral of ever-rising prices, which you can avoid by buying crypto. On the contrary, markets believe that the Fed will do whatever it takes to bring inflation back down to normal levels: The five-year, five-year forward inflation expectation rate, a measure derived from spreads between regular U.S. bonds and bonds indexed to the Consumer Price Index, has barely moved through this whole episode: