Investors should be aware of the close inverse correlation between the strength of the US dollar and Bitcoin.
A widespread debate among investors is the correlation of Bitcoin (BTC) with other markets. There has been a high degree of correlation between the stock markets and Bitcoin, particularly in recent months. In other periods, gold and Bitcoin appear to be moving in tandem. However, the correlation that needs to be monitored most closely is that of the dollar, as the global economy is based on the strength or weakness of our global reserve currency, the US dollar.
The weak USD drove up Bitcoin prices in the second quarter of 2020
The chart above shows the values of gold, Bitcoin and the dollar since the March decline. The orange line is gold, the blue line is the US dollar currency index (DXY) and the regular Bitcoin price is shown with the black line. The sudden impact of the global pandemic increased demand for US dollars, with a sharp rise in March as seen by the large blue rally. This spike caused the other markets to fall as Bitcoin’s price dropped by 50% to just $3,700.
However, since this massive drop, the DXY has been weakening by the day. This sudden dollar weakness caused other „safe haven“ assets to rise significantly over the past six months. Bitcoin rose 185% since the March collapse, while gold recovered 31%.but although the overall downward trend remains intact, the US dollar has experienced a rebound of relief in early September when a bottom building was made. An upward divergence was created to mark the beginning of the temporary bottom pattern, after which the 92.75 level was regained as support for further upward movement.
This relief rebound reached 94.60 points and caused other assets to fall substantially. Therefore, further weakness is to be expected in the commodity and cryptomone markets if the DXY continues towards 96 points.
USD in 2016 and 2017 boosted the Bitcoin cycle
The previous cycle’s highs were reached in 2014 and 2017 for Bitcoin, from which credible data can be derived from the US dollar’s correlation with Bitcoin.Throughout 2017, the US dollar showed significant weakness in all areas, as the EUR/USD pair also recovered from 1.03 to 1.25.
During this uncertainty and instability in the US dollar, Bitcoin had its maximum rally from $1,000 to $20,000. More interestingly, Bitcoin’s peak is surrounded by the DXY Index’s low cycle. Through this strength, Bitcoin’s bear market was fed through to the previous months. A substantial weakness in the DXY index is causing the price of Bitcoin and Gold to continue to rise. Will history repeat itself?
Dollar weakness after the Dot.com bubble caused a 600% increase in gold
What can be derived from the graph above is the strength of gold since the dot-com bubble burst in 2000. During the early stages of a potential collapse it is the settlement phase when all markets fall, as gold also corrected itself by 30% in 2000.
This is the search for liquidity to cover losses in the stock markets similar to what has been witnessed in March 2020.however, since the USD showed weakness in 2000, gold showed tremendous strength as a safe haven, which would have increased its portfolio by 600%.in the same period, the EUR/USD pair recovered from 0.85 to 1.60 in 2008.
The momentum then shifted as investors flew into the USD as a hedge during the credit crisis. But in the current times of uncertainty with negative interest rates, rising debt levels and deflation, Bitcoin is also doing relatively well. But Bitcoin and gold would benefit significantly later as safe havens against a weakened dollar, which is precisely what happened in December 2017 when BTC reached its historic high of nearly $20,000. Given this uncertainty and the exponentially growing debt, the US central bank has a choice: devalue the currency, which means further dollar weakness.