It is widely believed that when the U.S. dollar falls against other major global currencies (as measured by the U.S. Dollar Strength Index (DXY) ), the impact on Bitcoin (BTC) is positive, and vice versa.
For example, the DXY index fell from 103.0 in January 2017 to a low of 92.6 in August 2017, while Bitcoin rose from $1,000 to $4,930 over the same period. But is there enough evidence to justify a bull market similar to that of 2016-17, as some analysts believe?
But is there enough evidence to justify a bull market similar to the 2016-2017 one that some analysts believe?
Is Bitcoin’s reverse trend against the US dollar real?
Traders and influencers often warn of this negative correlation, and a reversal in DXY that could drive Bitcoin prices higher.
Investing research @GameofTrades_ recently published a chart showing the pattern in early 2023 before repeating itself later in May. There is some undisputed evidence for a negative correlation.
Bitcoin and DXY have been negatively correlated in 2023 YTD pic.twitter.com/VTePX3PNs6
— Trading Games (@GameofTrades_) June 22, 2023
In addition, technical analyst el_crypto_prof presents a bearish “Gaussian channel” change on the DXY chart, which according to the analysis matches the two bull markets in Bitcoin and altcoins in 2016-17 and 2020-21.
DXY (Dollar Index) color changes from green to red on the Gaussian channel.
The first two times this happened, bitcoin dollar Altcoins experienced a bull market (parabolic) in the following months (2016-2017 and 2020-2021).
Sounds exciting, doesn’t it? pic.twitter.com/kHJeM6iZDH
— ⓗ (@el_crypto_prof) June 26, 2023
BTC-DXY Correlation Over Time
The seemingly inverse relationship between Bitcoin and DXY has never lasted more than 7 weeks. The correlation indicator ranges from -100% (indicating that some markets move in opposite ways) to 100% (indicating movements in sync); 0 indicates a complete lack of correlation between two assets.
Over the past 670 days, 81% of the indicators have been negative, indicating that DXY and Bitcoin are generally in the opposite direction. That’s not how the correlation indicator works though, as readings between 0% and -50% indicate a lack of correlation.
In fact, the longest period the correlation was below -50% was 47 days from 18 August 2022. Therefore, it is statistically incoherent to say that Bitcoin is negatively correlated with the DXY index, because it is – since September 2021, it has declined by 50% or less on less than a third of the days.
Between June 2021 and November 2021, DXY and BTC prices exhibited a very similar pattern, with both rising during this five-month period.
However, events related solely to cryptocurrencies, such as the October 19, 2021 launch of the first U.S. bitcoin futures exchange-traded fund, could distort the metric.
But whatever the rationale behind the move, correlation is not causation, meaning it is impossible to conclude that DXY’s positive performance during this period has affected the price of Bitcoin.
Related: Will BlackRock’s ETF Drive Bitcoin Price Surge?
DXY still needs long-term analysis
While analysts and market influencers often use 20-day correlation data to explain daily price fluctuations, longer time frames are needed to understand any potential impact, if any, of DXY on Bitcoin’s price.
For example, when the Federal Reserve pumps trillions of dollars of stimulus into the economy, the effects on inflation and global money flows can take weeks. After all, not every household, business, financial institution puts money into circulation immediately.
But the price signals on the Bitcoin market are more immediate because Bitcoin is traded 24/7. As a result, price action is highly susceptible to news, macroeconomic data, and geopolitical events that can have an impact of weeks or even months.
June 8, 2022, Bitcoin’s 38% drop in 9 days is a perfect example.
Note that it took nearly 4 months for the DXY index to peak from 102.50 to 114.2 in late September 2022, even though Bitcoin bottomed out at $18,900 long before then.
DXY is not a good proxy for BTC price
In other words, those betting on a DXY index reversal ahead of a BTC price rise have no statistical support given that the correlation changes over time.
Furthermore, even if a negative correlation occurs, there may be a gap between Bitcoin’s immediate price action and the long-term trend of the USD Strength Index.
Whenever there are favorable (or unfavorable) developments in the cryptocurrency industry, historical correlation becomes irrelevant. This may be the case that influenced the recent rise in Bitcoin, but it cannot be directly attributed to the regression of the so-called “Gaussian channel” on the DXY chart.
Ultimately, given the multiple instances of positive correlation and gaps between the two assets, picking two or three instances of DXY index inverse correlation in past cryptocurrency bull markets is not enough to call a bull market similar to 2016-17′ price action.
This article is for general informational purposes only and is not intended and should not be construed as legal or investment advice. The views, ideas and opinions expressed here are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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