There has been an inverse correlation between the price of bitcoin and the strength of the dollar for some time now. The moment corona started and the global economy temporarily shut down, the dollar decreased in value. This is because the money press turned on and interest rates were slashed. It was at this point that bitcoin began to rise.
Currently the opposite is happening, the money press is slowly shutting down and interest rates are going up everywhere. Bitcoin is actually falling during this period. This does not necessarily mean that there is a 100% inverse correlation, there are bound to be other factors, but the strength of the dollar is currently a proxy of which way bitcoin could go.
Opposite directions
The chart below shows in green the strength of the dollar, orange is bitcoin. By dollar strength we mean how much USD is worth against a basket of international currencies, including the euro, the yen and so on.
The dollar has been recovering since late 2021, after being historically incredibly low. It is no coincidence that bitcoin reached its all-time high of 69 thousand dollars in November 2021. At the time, bitcoin seemed like the perfect insurance against inflation, but from then on it went downhill.
Dollar may rise further
According to analyst Peter Brandt, the dollar is not even at its strongest yet. He has shared an index chart of the US dollar which shows that a previously existing resistance has been broken. He did not comment on what this means for bitcoin, but we will come back to that later.
https://twitter.com/PeterLBrandt/status/1543252335501213698
The US central bank has already raised interest rates several times and plans to keep raising them at least until 2023. This means that there will be fewer dollars on the market and it will become scarcer, and therefore worth more compared to other currencies. It is very likely that we will see a continued strengthening of the dollar in the future.
Security rather than bitcoin
As the dollar rises, it is more attractive and safer for investors to hold their value in dollars rather than shares, cryptocurrency and other assets. The only exception are bonds based on the US dollar, investors would rather choose the safety of a US government bond than more risky investments.
If you look at the crypto market, you can see that institutional investors mainly got out of crypto last week. For example, just last week 500 million dollars was withdrawn from Purpose's bitcoin ETF.
Stocks, bitcoin and the correlation with the dollar
The dollar and bitcoin price are thus moving in opposite directions. Notably, the weekly correlation coefficient between BTC and USD fell to 0.77 below zero in the week to July 3. This is the lowest in seventeen months.
Bitcoin is not alone in this. In the chart below, you can see some of the different stock indices. Yellow is our own AEX, red is the S&P500 and blue is the NASDAQ. The latter is particularly interesting as many traders believe there is a correlation between shares of tech companies and bitcoin.
Whereas the correlation between the dollar and bitcoin sits at 0.77 below zero on July 3, the correlation between bitcoin and the NASDAQ is 0.78 above zero.
The dollar is expected to strengthen at least until 2023, and equity and crypto markets should prepare for many more painful declines. At least, if the inverse correlation holds.
Ahead of the market
What you also see is that traders are getting smarter and anticipating bad news such as a rise in interest rates sooner. This is called frontrunning; you are ahead of the news.
For example, you can sell your bitcoin or shares before the US central bank goes back into session about interest rates, and buy these assets back after prices have dropped. This is called pricing in: future events are then already included in the current price.
Can the chosen price change?
It is also important to remember that a rise in interest rates is a reaction to inflation. May's inflation rate in the US was 8.6% compared to 12 months earlier. If inflation declines in the coming months, the US central bank may decide to stop raising interest rates sooner and the dollar may weaken. At that point, it becomes less important for investors to opt for the relative safety of the dollar.
JP Morgan interviewed several economic analysts about this. 40 percent of those interviewed think that by the end of the year, the dollar will not be stronger than it is now. 36 percent even think that the dollar will fall before the end of the year.
https://www.indexuniverse.eu/bitcoin-analysis-dollar-is-getting-stronger-what-does-this-mean-for-crypto/
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