Bitcoin Is Now Directly Correlated With The US Dollar

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In the ongoing banking crisis in the United States, the US Dollar (USD) has a direct correlation with Bitcoin.

bitcoin has a positive correlation with usd

According to Caco, a digital asset market provider, bitcoin, the most valuable cryptocurrency, appears to be moving synchronously with the USD as the market adopts a wait-and-see approach amid fears of further turbulence in the United States financial markets.

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Historically, Kaiko notes, bitcoin has moved inversely with the USD. This means that whenever the USD rises, bitcoin tends to fall. This has been observed over the past few months, especially throughout 2022, resulting in what is known as Crypto Winter.

As the USD strengthened across the board in 2022, crypto prices including BTC were not spared. For example, bitcoin declined from a high of $69,000 registered in November 2021 to a low of $20,000 in November 2022.

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The crypto meltdown was made worse by the collapse of UST, an algorithmic stablecoin by Terra, the crash of several centralized finance projects like Voyager Digital and BlockFi, and the spectacular fall of FTX, the Sam Bankman-Fried exchange, in November.

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Bankruptcies and failure of some of these platforms undermined user confidence, forcing capital flight from crypto markets to safe havens beyond gold and USD.

For example, at some point in 2022, DXY data, an index that tracks the USD, showed the greenback strengthening by more than 20%.

US Dollar Index on March 17.  Source: TVC on TradingView
US Dollar Index on March 17. Source: TVC on TradingView

During that time, BTC more than halved, mirroring the correlation between USD and bitcoin.

The DXY measures the strength of the USD against a basket of other currencies, including the Japanese yen, euro, Chinese yuan and others. If the USD strengthens and falls relative to these currencies the index will rise.

the tide is turning

By mid-March 2023, Kaiko sees an uptick in bitcoin and crypto prices coinciding with relative strength against the US dollar; And shifting. When BTC price surged from $19,700 to $26,300 last week, the USD is up 3% since the end of February 2023. The USD remains stable despite questions raised regarding the monetary policy approach adopted by the Federal Reserve.

There have been more questions about the effectiveness and pace of rate hikes over the past few months. Although inflation is low, it is not at the ideal level.

The Fed’s goal is to eventually reduce inflation to around the 2% benchmark level. While critics descend on the Fed, the USD is stable, keeping pace with bitcoin, it is relatively overpriced.

Feature image from Canva, chart from TradingView

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