Bitcoin and Dollar: Unlikely Allies
In this study we will understand why and how the impacts of the traditional economy have influenced the entire digital asset market.
The strength of the dollar directly impacts Bitcoin's performance, not only recently, but since its inception.
In this study we will understand why and how the impacts of the traditional economy have influenced the entire digital asset market, which, as unlikely as it may seem, have a correlation.
The DXY is an index that measures the strength of the dollar against a basket of global currencies, below you can see the weighting of these currencies and their respective tickers.
The index started in 1973, shortly after the dissolution of the gold standard during the Bretton Woods Agreement.
The importance of measuring the strength of the dollar is precisely because of its ability to translate several economic indicators into a single index (interpretation center). Through this we can see not only how strong the US currency is but also the flow of capital in the world.
The dollar has been consecrated in the last 40 years as the “global monetary value reserve” and therefore has been used as a refuge for situations of currency devaluation, in the case of foreign countries. And as a means of maintaining cash in the face of bear markets.
Therefore, we managed to capture not only the economic health of the world, but also a large part of the capital flow that is in assets or in cash.
Recently, the dollar strength index reached the highest value of the last 20 years, evidencing the amount of capital out of the market.
In a high inflation environment it is more preferable to hold cash-generating assets than cash, however, if the central bank is in a process of monetary contraction risky assets as a whole are penalized.
More difficulty in accessing credit, less consumption, less profit.
This type of effect ends up penalizing what is considered by the legacy as the “highest risk asset”
Bitcoin has had an inverse correlation to DXY, that is, it moves mostly in the opposite direction to the strength of the dollar.
Dollar goes up, BTC goes down.
Dollar goes down, BTC goes up.
This type of correlation has been more present during the busiest moments of #Bitcoin, both in bulls and bears.
Since the beginning of 2022 (bear race) the correlation coefficient has remained negative. (Inversely proportional).
At this point, you can see above the level of correlation between the dollar strength index and Bitcoin.
As much as the shorter term correlation (60d) has reduced a bit, we still see the 6 month correlation strongly negative.
Which means that while daily movements can occasionally be distinctive, the mid/long term trend for digital assets (Bitcoin as a proxy for everything else) the central trend is inversely correlated.
In order for Bitcoin to return to a new bullish cycle, the dollar needs to retreat
And in fact, this is not today!
Since 2011 we have been able to plot this inverse correlation between DXY and BTC. But not only that, we also see an inverse correlation with the S&P 500 Volatility Index, known as the VIX.
Here we have greater clarity on the movement of capital allocation in the last 10 years. Moments where stock market volatility increases = greater risk = reduced exposure, selling positions and acquiring dollars = dollar strength increases.
With increased risk of operations, investors seek refuge in the dollar, risk market is left with less capital. Bitcoin therefore also with less capital and risk propensity = Bear Market.
We've seen this throughout Bitcoin's existence, it probably won't end today
In this way, we can conclude that Bitcoin not only has its price reflecting the movement of capital in the world today, as in fact it always did.
This does not mean that Bitcoin will always be seen as a risky asset, but that while we see this correlation, both investors and speculators will need to understand the market as a whole to understand BTC price movement.
Bitcoin does not trade in a vacuum and does not make independent medium/long term moves. Seeing the global scenario is/will be necessary.
This was a simplified explanation, because to understand the current strength of the dollar and the flow of capital across the planet it is necessary to understand the forces that guide the market, be it inflation, monetary policy or geopolitical conflicts.
Want to understand the price of Bitcoin?
Think Macro!
This research article was initially published on this BlockTrends link. Graphics and study developed by Cauê Oliveira
Great content, Caue, as usual. I assume DXY will keep getting stronger, but what I don't see is the devaluing of Real. The pair real/dollar is very volatile and also haven't been following the DXY's lead. As a Brazilian, should we expect a stronger dollar against real or otherwise? Keep up the good work.