Reasons behind the Bitcoin price rally

Reasons behind the Bitcoin price rally

After the Bitcoin price’s extreme loss of volatility in recent weeks, yesterday’s rally feels like new hopium and a massive move to the upside. For the first time in three weeks, the price has passed $20,000, and the move came as a surprise to many.

Most recently, inflation fears and macroeconomic uncertainty have dominated the crypto market. Fundamental changes in this regard did not occur yesterday. So what was the reason for yesterday’s rise in the Bitcoin market?

What is clear is that the stock market also rose yesterday, when among others Microsoft and Google reported earnings. However, it is questionable whether this was enough to revive Bitcoin’s volatility. A better explanation might be the Dollar Index (DXY).

As the DXY began to lose ground between 8 and 10 a.m. EDT, Bitcoin’s price rose shortly thereafter. The DXY fell from 112,072 to 110,846 points during these two hours. During the same time, the Bitcoin price showed initial strength, which then extended into a further rally. This phenomenon is not new.

For much of 2022, Bitcoin and the dollar index were highly correlated in an inverse relationship, i.e. while DXY rose, BTC fell. While the correlation has fallen again in recent weeks, yesterday’s move may indicate a resumption of the correlation.

Bitcoin Price vs DXY Chart
Bitcoin price correlation with DXY. Source: TradingView

Whether BTC can post more gains may thus depend on the weakness of DXY. In this regard, the Federal Reserve (FED) is likely to be in focus for investors again.

Markets will then look to tomorrow’s US gross domestic product (GDP) report to gauge the FED’s future policy. Currently, the US economy is expected to have grown by 2.4% in the 3rd quarter, which would mean that rate hikes are not having too much of a negative impact on the economy at this point.

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This in turn could reinforce the FED to pursue more higher rate hikes. As the central bank recently reiterated, it will continue to raise interest rates until something breaks. A weakened economy may just be the first indicator that the Fed will soon have to abandon its aggressive plan to raise interest rates. The next FOMC meeting on 2 November may provide further insight into this.

More Insights into the Bitcoin Price Rally

Arthur Hayes, co-founder of BitMex and widely respected voice in the crypto space, found another explanation for why DXY fell and BTC pumped. Like Hayes discussedthe US Treasury is considering providing the market with more short-term treasury bills to reduce the shortage.

Money market funds like short-term T-bills, but it’s not enough that they park their money in the Fed’s reverse repo facility. […] Money in RRP is dead money that cannot be used by the banking system. Money in treasury bills is LIVE and can be used to spoil risky financial assets.

That’s $2.2 trillion in guidance price, if that number goes down BOOM BABY BOOM! Let’s go, Lambo is too bad!

According to Hayes, RRP balances have fallen slightly in the past month. Nevertheless, the market expects this buyback action to push RRP balances further down. Buy-backs and re-issues of new current treasury bills have not yet taken place, however. If this does not happen, there could be a dramatic reversal of yesterday’s trend.

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