Bitcoin is now directly correlated with the US dollar
In the ongoing banking crisis in the United States, the US dollar (USD) appears to correlate directly with Bitcoin.
Bitcoin correlates positively with the USD
According to Kaiko, a digital asset provider, Bitcoin, the most valuable cryptocurrency, appears to be moving in sync with the USD as the market adopts a wait-and-see approach amid fears of further turbulence in the US financial markets.
Historically, #Bitcoin has had an inverse correlation with the US dollar.
Over the past month, this negative correlation has largely disappeared amid a major market rally. pic.twitter.com/Q9H0T4k51M
— Kaiko (@KaikoData) March 17, 2023
Historically, Kaiko notes, Bitcoin moves inversely with the USD. That means every time the USD increases, Bitcoin tends to crumble. This has been observed in recent months, especially throughout 2022, resulting in what became known as the crypto winter.
As the USD strengthened across the board in 2022, crypto prices, including BTC, were not spared. To illustrate, Bitcoin crashed from as high as $69,000 recorded in November 2021, and fell below $20,000 in November 2022.
The crypto meltdown was exacerbated by the collapse of UST, an algorithmic stable coin of Terra, the crash of several centralized finance projects such as Voyager Digital and BlockFi, and the spectacular fall of FTX, the Sam Bankman-Fried exchange in November.
The bankruptcy and failure of some of these platforms undermined user confidence, forcing a flight of capital to safe havens outside the gold and USD crypto markets.
At one point in 2022, for example, DXY data, an index that tracks the USD, showed the dollar strengthening by over 20%.
During that time, BTC more than halved, showing the relationship between the USD and Bitcoin.
DXY measures the strength of the USD against a basket of other currencies, including the Japanese yen, the euro, the Chinese yuan and others. The index will rise if the USD is strong and fall if it falls against these currencies.
The tide is changing
As of mid-March 2023, Kaiko observes that the rallying of Bitcoin and crypto prices appears to coincide with the relative strengthening of the USD; and shifts. As BTC prices rose from $19,700 last week to $26,300, the USD added 3% from the end of February 2023. The USD is holding firm despite questions raised regarding the monetary policy approach adopted by the Federal Reserve.
There have been several questions about the effectiveness and speed of interest rate increases in recent months. Although inflation is lower, it is not at ideal levels.
The Fed aims to reduce inflation to around the 2% benchmark level. While critics descend on the Fed, the USD is stable, and in sync with Bitcoin, it is relatively higher.
Feature image from Canva, chart from TradingView
