Bitcoin fell more than 4% on Friday to $68,500, erasing three months of gains and reviving the question of whether its bear market ever really ended. The trigger isn't crypto-specific. It's inflation, and a bond market that suddenly pays better.

The mechanics are straightforward. Tuesday's Consumer Price Index (the U.S. government's headline inflation gauge) showed prices rose 0.4% in October, above economists' forecasts. Core inflation, which strips out food and energy, also ran hotter than expected. Traders now overwhelmingly expect the Federal Reserve to raise interest rates by a quarter percentage point in December, with some betting on a larger move.

Higher rates change the math for assets that pay nothing. "Because these are non-yielding assets, and we expect inflation to rise… people are chucking stuff like gold and Bitcoin to find… government bonds that are going up, providing you [with] income," Chris Beauchamp, chief market analyst at IG Group, told Fortune.

How weak is crypto demand right now?

The sell-off shows up in the plumbing of the market, not just the price. CryptoQuant, a crypto analytics provider, recorded its weakest demand indicator reading since December 2023. Bitcoin exchange-traded funds (funds that track the coin's price on stock exchanges) flipped back to net sellers.

Liquidity is shrinking too. Tether's USDT, the largest dollar-pegged stablecoin, lost $7.7 billion in total value over the past two months, according to CryptoQuant — a sign, analysts say, that less cash is circulating in crypto markets.

Gold tells the same story. It traded near $3,900 an ounce on Friday, far below its January peak of about $5,600, per Trading Economics. Prices are down roughly 5% over the past month and nearly 5% year over year.

Why did Bitcoin's recovery stall?

Bitcoin's year has been a round trip. It hit $58,000 in June. Optimism returned in August, when the U.S. Treasury announced plans to expand its bond buybacks, sparking a rally that carried the coin to $86,000 in September. Since then, it has slid steadily.

Politics added friction. The midterm elections handed Democrats control of Congress — a setback for a crypto industry that has leaned on Republican allies to push favorable legislation. Yet Bitcoin initially took the result in stride, largely because investors saw it coming.

"The midterm results weren't a surprise, and they don't change the regulatory interpretations as they stand today… We at least have some regulatory stability for two years," said Stephen Coltman, head of macro at crypto asset manager 21Shares.

Where does the AI boom fit in?

Here's the twist: Bitcoin's fortunes are tangled with artificial intelligence. Heavy borrowing and spending on AI have created what 21Shares calls an "AI black hole" — capital pulled toward the sector and away from assets like Bitcoin and gold.

But the relationship cuts both ways. Bitcoin remains "joined at the hip" with tech stocks, in Beauchamp's phrase. When AI enthusiasm runs high, it competes for Bitcoin's investment dollars. When that enthusiasm fades, Bitcoin risks being dragged down with it.

The boom also shapes the rate outlook. In Coltman's view, AI spending is propping up an otherwise weak economy, giving the Fed room to keep fighting inflation with higher rates. There's an exit, though a conditional one: if rising borrowing costs force AI companies to rein in spending, the economy could weaken enough for the Fed to change course — and that, potentially, gives Bitcoin breathing room.

For now, investors keep chucking. Bonds pay. Gold and Bitcoin don't.