Bitcoin erases nearly all gains sparked by optimism about US presidential order on crypto. Image Credit: Shutterstock

Bitcoin dropped back below $40,000, erasing nearly all gains sparked by optimism about U.S. President Joe Biden's executive order on crypto, as digital currencies fell with stocks Thursday amid high inflation data and continued geopolitical uncertainty.

The largest cryptocurrency declined as much as 7.9 per cent to $38,582 on Thursday, falling for the first time in three days. Ether fell as much as 5.7 per cent to $2,553. Most of the top cryptocurrencies were down at least slightly in the last 24 hours, according to pricing from CoinGecko.

US stocks and other risk-on assets are under pressure after the nation's consumer price index jumped to a 40-year high and as the war in Ukraine continues to weigh on commodities. In recent years, Bitcoin has demonstrated a tendency to follow moves in the stock market. A 50-day correlation coefficient between the token and S&P 500 - one of the most watched U.S. market gauges - stands at 0.5, with a score of 1 equating to lockstep moves.

In terms of risky assets, digital currencies fall on the far-end of the spectrum, according to Callie Cox, US investment analyst at eToro. Yet, in a survey of 100 institutional investors and wealth managers, 73 per cent saw Bitcoin as a viable hedge against inflation, according to research commissioned by London-based Nickel Digital Asset Management.

"Based on the way that crypto works, naturally, it could be a good inflation hedge," Cox said by phone. "But with all the speculation wrapped up in it, and all the money that you're seeing with it being an emerging market and taking steps to being a mature market, it may not be acting like an inflation hedge right now."

Bitcoin jumped as much as 11 per cent on Wednesday amid optimism about the trajectory of US regulation of digital assets, as the framing of Biden's executive order on cryptocurrencies was made clear. However, those gains proved fleeting as traders digested the news, and the token is again trading near the middle of the range where it's spent most of the past two months.

"Although the initial reaction to the Biden digital assets executive order was 'it's not as bad as it could have been,' a closer look at the details shows that it does not remove potential regulatory risk," said Jeffrey Halley, senior market analyst at Oanda Asia-Pacific.