Bitcoin is finally recovering following inflation concerns in China and mainstream adoption in El Salvador, where the parliament approved the crypto as legal tender.
At the moment, Bitcoin is trading at almost $35,000, recovering from a bad two weeks which resulted in a low level of $31,000, the worst it has done since May 23.
Why did this happen?
China’s producer pricing index (PPI), commonly known as factory-gate inflation, increased by 9% last month, the largest year-over-year increase since September 2008.
This data is relevant worldwide, since because the country is a sizable global buyer and supplier, it adds to inflationary pressures throughout the world.
Dariusz Kowalczyk, an Economist at Crédit Agricole, spoke for Financial Times about this data, saying: “Rising costs everywhere, in particular in China, will be adding to global inflationary pressures. I think we are going to live with higher inflation globally, and what’s happening in China will contribute to that.”
That’s good news for bitcoin (BTC, +9.3%), which is commonly seen as an inflation hedge because the rate of the supply increase is cut in half every four years.
Large gains, on the other hand, may be elusive for some time due to fears that officials around the world would raise interest rates or reduce liquidity-boosting asset purchase programs in order to curb inflation, a process known as tapering. The attractiveness of store of value assets like bitcoin and gold tends to dwindle when monetary policy tightens.
According to Caixin Global, China is already pulling liquidity from the system. Meanwhile, the Federal Reserve of the United States has been under fire in recent weeks for its loose monetary policy, with many experts claiming that it is unsuitable in light of mounting inflation fears.
Another factor that might have helped the price increase is the mass adoption of Bitcoin in El Salvador. Early on Wednesday, El Salvador’s parliament recognized bitcoin as legal cash, requiring all companies to accept bitcoin as payment for products and services. The action has sparked expectations for broader acceptance of sovereignty.