This event could help Bitcoin escape the crypto winter
It’s been a long, dark crypto winter Bitcoin (BTC 3.37%), with the price of the world’s largest cryptocurrency now down nearly 60% this year. High inflation, which has led to aggressive rate hikes by the Federal Reserve, has largely led to cryptocurrencies acting much like tech stocks, which do not fare well in the face of rising interest rates.
With several rate hikes predicted, many are now wondering when the crypto winter will end. While it is difficult to predict the future in the short term, there is one event that may allow Bitcoin to escape these difficult times.
An extremely strong US dollar
Apart from rising interest rates, one event that has apparently affected the crypto market is the rising US dollar, which has reached a 20-year high. The dollar index, which tracks the US dollar against other currencies, is up nearly 18.5% this year. The dollar briefly surpassed the euro and has also closed in on the British pound.
Image source: Getty Images.
Not only have rising interest rates contributed to the strong dollar, but the US dollar is also the world’s reserve currency and right now the world is reeling from Russia’s invasion of Ukraine, which has led to disruptions in the energy market. This has led to more fighting in Europe and the UK, and significantly dulled the region’s economic outlook.
While the U.S. economy may be heading into a serious recession, most economists would still rate their outlook compared to other parts of the world right now. All of this has led to investors and other stakeholders moving into the dollar in a flight to safety.
But a strengthening dollar has historically not been good for Bitcoin, which tends to trade inversely to the dollar. If you think about Bitcoin’s origins, this makes some sense. Bitcoin was originally founded after the Great Recession when people had little faith in the mainstream financial system, which at the time had just played a major role in bringing the economy down.
The aim was to create an alternative currency and financial system outside the government’s control, giving it less chance of manipulation. So if there is a lot of faith in the dollar, there is probably less faith in crypto.
How the US Dollar Can Help Bitcoin
If a rising US dollar hurts Bitcoin, a falling US dollar is likely to help the world’s largest cryptocurrency. Generally speaking, the dollar’s strength has had a solid correlation to the Fed’s benchmark overnight lending rate, the Federal Funds rate.
While members of the Fed still expect to have to continue raising interest rates later this year, there is a decent amount of investors who believe that the Fed is going to have to swing faster than the market thinks because the economy is headed for a more severe recession that will not allow the Fed to be so restrictive with policy.
But even if this happens, the dollar could still be strong if it continues to be a safe haven for investors while other European economies struggle, so keep an eye on geopolitical events such as Russia’s occupation of Ukraine and the resulting energy crisis abroad. Still, with the dollar so hot right now, I think there’s a chance it could cool down in the near future, which could be a boon for Bitcoin.
