Bitcoin's escape from the trenches proved short-lived. The cryptocurrency fell more than 4% on Friday to $68,500, erasing the gains it had built over the past three months and renewing doubts about whether its bear market was ever really over.

Investor appetite is fading as well, according to crypto analytics provider CryptoQuant. The firm's demand indicator logged its weakest reading since December 2023, and Bitcoin exchange-traded funds — a vehicle that gives traditional investors bitcoin exposure through ordinary brokerage accounts — flipped back to net sellers.

The downturn has spilled into other corners of the crypto market, too. Tether's USDT, the largest cryptocurrency pegged to the U.S. dollar, saw its total value shrink by $7.7 billion over the past two months, according to CryptoQuant — a sign that less cash is available in crypto markets, where the token functions as a key source of buying power.

This time, inflation has been the main culprit. Tuesday's Consumer Price Index report showed prices rose 0.4% in October, more than economists expected, and even stripping out food and energy, inflation ran hotter than forecast. Traders now overwhelmingly expect the Federal Reserve to raise interest rates by a quarter percentage point in December, with some betting on an even bigger increase. For assets that pay holders no income, the stakes of that shift are direct: the further rates climb, the more attractive interest-bearing government bonds become relative to Bitcoin and gold.

"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 financial technology company IG Group, told Fortune.

Bitcoin is not retreating alone. Gold traded near $3,900 an ounce on Friday, well below its January peak of about $5,600, according to financial data provider Trading Economics. Prices have fallen roughly 5% over the past month and nearly 5% from a year ago — a parallel slide that underscores how broad the retreat from non-yielding assets has become.

Bitcoin's bad year

Friday's drop dealt a fresh blow to Bitcoin investors, who had only recently found their footing after months of losses. After Bitcoin hit $58,000 in June, optimism returned in August when the U.S. Treasury announced plans to expand its bond buybacks. The announcement helped spark a rally that carried Bitcoin to $86,000 in September. Since then, though, it has been sliding again — Friday's level of $68,500 sits roughly 20% below that September peak.

Recent political news has also made Bitcoin's recovery an uphill battle, though the asset held its ground until Friday. The midterm elections handed Democrats control of Congress, a setback for a crypto industry that has leaned on Republican allies to advance favorable legislation. Still, Bitcoin initially took the results in stride, largely because investors had seen the outcome coming, according to Stephen Coltman, head of macro at crypto asset manager 21Shares.

"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," he said.

The AI tug-of-war

Inflation and politics are not the only forces shaping Bitcoin's outlook. Analysts say the cryptocurrency is also caught up in the AI boom, which is competing for investors' money while helping keep the economy strong enough for interest rates to stay high.

Heavy borrowing and spending on AI have created what 21Shares calls an "AI black hole," drawing money toward the sector and away from assets like Bitcoin and gold. Yet Bitcoin remains "joined at the hip" with tech stocks, according to Beauchamp — an awkward position that sees it compete for investment dollars when enthusiasm for AI runs high, yet get dragged down when that enthusiasm fades.

The boom also complicates the outlook for interest rates. In Coltman's view, AI spending is helping prop up an otherwise weak economy, giving the Fed room to keep fighting inflation with higher rates. If rising borrowing costs force AI companies to rein in spending, the economy could weaken enough to push the Fed to change course, potentially giving Bitcoin some breathing room. The Fed's December meeting is the next scheduled decision point for those rate expectations, and whether AI companies begin curbing spending as borrowing costs rise is the development Coltman's scenario points to as most capable of changing Bitcoin's picture.

This story was originally featured on Fortune.com.