Roughly half of bitcoin's recent returns are driven by fears of rising inflation, Bloomberg economists estimate

• It's no coincidence that bitcoin briefly surged to record highs on the same day CPI data showed the highest inflation since 1990.
• About 50% of the demand for bitcoin is being driven by investors seeking a hedge to rising inflation, according to Bloomberg economists.
• Other factors driving bitcoin's record rally include momentum trading and market exuberance.

Inflation is on the rise in the US amid ongoing supply-chain constraints, rising wages, and pent-up demand from consumers following the COVID-19 pandemic, recent CPI data shows.

It's likely no coincidence then that on the same day data showed consumer prices are rising at the fastest pace since 1990, bitcoin briefly hit a record high of about $69,000.

"Our model shows that for bitcoin, the importance of inflation and hedging against uncertainty become more important drivers over time, accounting for 50% of price moves in the latest cycle relative to 20% in 2017," Bloomberg economists Björn van Roye and Tom Orlik said in a note last month.

Bloomberg's data backs up the long-running argument from bullish bitcoin investors like MicroStrategy CEO Michael Saylor, who points to the limited supply of bitcoin as a viable hedge against the increased supply of fiat currencies from central banks around the world.

When bitcoin was created in 2009, it was set to have a fixed supply of 21 million coins that would take more than 130 years to be mined. Since its inception, nearly 19 million bitcoins have been mined, and estimates suggest nearly 4 million bitcoins have been lost, burned or forgotten about.

The supply cap and rising price of bitcoin could also be spurring the remaining demand for the coin, according to Roye and Orlik, who estimate half of its recent return comes from momentum traders and market exuberance, meaning that as risk assets like stocks move higher, so does bitcoin.

"From July 20 to October 8, the dominant factors affecting bitcoin were market exuberance and fear of inflation," the Bloomberg economists said, based on their models.