Thursday, February 29, 2024

Historically, Bitcoin Has Moved in The Opposite Direction of The US Dollar Index

Bull and bear runs in the cryptocurrency markets have followed periods of low and even negative interest rates, large-scale asset purchases, and long-maturity lending, to name a few. In theory, crypto assets offer a hedge against inflation, scarcity protecting their value against adverse price fluctuations. Bitcoin, for instance, holds its purchasing power over time – in other words, it remains stable or its value increases. At any rate, adoption is expanding, with an ever-increasing number of people looking to buy Bitcoin P2P concerned about inflation and currency debasement. Cryptocurrency markets tend to perform well during periods of low market volatility and less well during periods of high market volatility. 

Throughout history, Bitcoin has had an inverse correlation to the US Dollar Index because its supply remains fixed and is traded against the dollar. As the world of finance continues to evolve at a rapid pace, the relationship between traditional investments and emerging assets is becoming increasingly complex. Bitcoin is less affected by macroeconomic factors, but experts argue that it can’t remain indifferent to the US Dollar Index for too long. In other words, the tide could change. The point is that there’s no definite proof Bitcoin and the US Dollar Index are absolutely inversely related. 

What Is the Us Dollar Index and Why Does It Matter? 

The US Dollar Index, USDX for short, is a measure of the dollar against foreign currencies (euro, British pound, Japanese yen, Swedish krona, Canadian dollar, and Swiss francs), created to help traders understand when it’s time to buy or sell based on what’s happening in markets worldwide. As the dollar gains strength, the index goes up and the other way around. The euro is the index’s largest component, making up roughly 57.6% of the basket. The US Dollar Index is influenced by the supply and demand for the dollar and the currencies that make up the basket, not to mention recessions or economic growth.

Bitcoin and the US Dollar Index have been negatively correlated, moving in opposite directions. Simply put, when the dollar strengthens, Bitcoin decreases, and when the dollar weakens, Bitcoin increases. Attention must be paid to the fact that this correlation isn’t always consistent and can be influenced by factors such as market sentiment, global economic developments, and, last but not least, regulatory actions. To determine the impact of global liquidity on the cryptocurrency markets, it’s necessary to look at the money supply. Huge spikes in cryptocurrency have occurred due to factors that aren’t directly related to monetary policy. An illustration of this is the FTX collapse. 

The Decline in The US Dollar Index Could Hasn’t Push the Bitcoin Price Higher 

The dollar recorded its highest weekly decline since November against the six currencies forming the index. To be more precise, the US Dollar Index fell to 2.26%, a decline exacerbated by US producer and consumer inflation data revealing that some of the price pressures eased. The markets overreacted a little bit to the numbers. Even if the Us Dollar Index dropped below 100 points for the first time since last year, Bitcoin traded between $30,000 and $32,000. Speaking to Coindesk, financial analyst Noelle Acheson noted that the rupture in the negative correlation won’t last long, and Bitcoin must react to the decline in the dollar.  

The dollar is the center of business on the planet. Many countries have pegged their currencies to the dollar following the war, ending the gold standard, such as Cuba, Bahrain, Jordan, Belize, Eritrea, Djibouti, Hong Kong, Panama, Lebanon, the United Arab Emirates, Oman, Qatar, and Saudi Arabia. The most popular and largest stablecoin by market capitalization, Tether, is pegged to the dollar. One USDT is valued at 1$. The International Monetary Fund informed the dollar accounts for approximately 59% of all foreign monetary reserves. Surprisingly, the dollar isn’t the strongest currency in the world. 

It Seems That Bitcoin’s Trend Took a Pause for Some Consolidation 

The outlook for the US Dollar Index from a valuation and sentiment standpoint is of the essence to determine the short- to medium-term outlook for Bitcoin. Acheson strongly believes the negative relationship between Bitcoin and the US Dollar Index will return soon enough. Therefore, a weaker dollar will increase global liquidity by giving investors a period of respite in which they can think about what to do next. The US Dollar Index may experience further declines, but the dollar won’t lose its dominance anytime soon. Still, a long-term trend toward currency diversification may develop. 

Bitcoin traders can now expect a long consolidation phase as the cryptocurrency is trading at   $30,074.56. As mentioned earlier, this period of relative quiet is quite surprising, and the lack of certainty regarding price movement reflects uncertainty about macro backup. Key drivers for Bitcoin are market confidence, adoption, technology, and liquidity conditions. No one can say for sure how the American economy will perform in the following quarters. In other words, every recession has its own path. There are many similarities between now and the economic recession that was precipitated in the US by the financial crisis of 20007-08, but it could be just a regular cyclical downturn.   

Concluding Thoughts 

2024 is an election year, and an economic crisis could trigger a political turnover. Even if it may take time and effort, US policymakers will avoid the looming recession by stimulating sustainable growth. The dollar is inversely correlated with the prices of Bitcoin and other cryptocurrencies. Investors should favor digital currencies when the dollar is expected to weaken and demonstrate the opposite amid dollar strength. Certain events can derail the expected relationship between Bitcoin and the US Dollar Index for short periods of time. Since correlation doesn’t necessarily imply causation, there’s no cause-and-effect relationship between the two, meaning that a change in the US Dollar Index doesn’t provide insight into future movements of the cryptocurrency markets. 

The relationship between Bitcoin and the US Dollar Index is a dynamic one, so it’s important for traders to stay informed about the latest trends. When favorable or unfavorable developments occur, historical correlations are pointless.