For probably about two years now, it has been widely accepted in the cryptocurrency community that “BTC is an independent asset class,” demonstrating that the first cryptocurrency works well as an investment tool that barely correlates with the business cycle and is not even associated with other asset classes. On August 18, 2020, CoinShares even published quite a report about this, which was mainly talking about the lack of correlation between bitcoin and traditional commodities and stocks.

But what about the correlation with the US Dollar Currency Index (DXY)? Max Keiser was one of the first draw our attention to the negative correlation of bitcoin with the US dollar. In other words, when the US dollar goes up, BTC generally tends to go down. I will also add that there is rarely a positive correlation between BTC and the US dollar.

Nonetheless, if there is a positive correlation, it carries medium to long term risks for a stable uptrend in bitcoin.

Examples of negative correlation between BTC and DXY

Bitstamp: BTC / US dollar. Source: TradingView.

In the chart above, we can see that the downtrend of the US dollar, which started on December 19, 2016, at $ 103.10, caused the price of BTC to rise sharply from $ 890 to $ 18,953, while that the US dollar fell to $ 89 on January 22, 2018. A similar situation was seen on March 16, 2020, when the US dollar entered a sharp downtrend due to the not entirely rational monetary policy of the United States. US government financial institutions.

These two examples perfectly illustrate the classic approach to the inverse correlation between bitcoin and the US dollar. These are not the only examples of this statement; you can easily find other earlier examples through a trading chart provider.

Examples of positive correlation between BTC and DXY

The historical correlation between the US dollar and the price of bitcoin indicates that the current strengthening of the former could threaten the latter.

Bitstamp: BTC / US dollar. Source: TradingView.

As you can see from the chart above, a positive correlation leads at least to uncertainty and at most to wild turbulence, including significant bearish corrections.

In the long term, the noticeable strengthening of the US dollar between January 22, 2018 and March 16, 2020, had a very negative impact on the state of bitcoin. In fact, it looks like the periods marked on the chart may have been among the worst milestones in bitcoin history, comparable to the first “crypto winter” of 2013-2015, as retail investors suffered colossal losses first. place, just like other groups. traders.

Now, understanding from historical examples that the correlation between bitcoin and DXY exists, it is clear that this correlation really needs to be seriously watched. Let’s turn to the factors behind the current strengthening of the US dollar, which carries medium to long-term risks to the outlook for the bitcoin price cycle.

The current state of Bitcoin and DXY

First, let’s take a look at the technical table of the correlation of the considered assets and determine what kind of correlation is observed right now.

The historical correlation between the US dollar and the price of bitcoin indicates that the current strengthening of the former could threaten the latter.

Bitstamp: BTC / US dollar. Source: TradingView.

The chart above shows the second positive correlation between the US dollar and bitcoin this year, which comes with a lot of risks for bitcoin.

From May 25 of this year, the US dollar began a steady uptrend as part of a sort of consolidation accumulated from November 6, 2020 to September 3, 2021. As part of this consolidation, there was also the first local positive correlation, which led to bitcoin’s collapse with general negative signs of an impending correction on April 14, 2021. In addition, the US dollar managed to overcome resistance at $ 94.895 and consolidated with success above, that is, the DXY is still bullish.

Three key factors are supporting the rise of the US dollar, but with the potential to hurt bitcoin for the foreseeable future:

1. Bullish formation on the DXY weekly chart:

The historical correlation between the US dollar and the price of bitcoin indicates that the current strengthening of the former could threaten the latter.

US dollar currency index (DXY, one week). Source: TradingView.

The successful implementation of this model can bring some very nasty surprises to bitcoin, as professional investors will weaken their positions in all risky assets, of course, which are also BTC. A successful breakout of the $ 100 mark will result in a more severe reduction in long positions in bitcoin and its derivatives, including traditional stock market tools on BTC.

2. The number of transactions of foreign participants with the US dollar:

The historical correlation between the US dollar and the price of bitcoin indicates that the current strengthening of the former could threaten the latter.

The foreign official deals with the US dollar. Source: FRED.

Daily Repo Repurchases (REPOs) for non-residents (brown line) are trending upward, suggesting that the US dollar is still in demand. I think this is the main factor supporting the bullish sentiment in the US dollar right now.

3. The state of the dollar’s liquidity on the international market:

The historical correlation between the US dollar and the price of bitcoin indicates that the current strengthening of the former could threaten the latter.

TED spread. Source: FRED.

The TED spread reflects the demand for dollar liquidity in the global market in London, UK (LIBOR).

As you can see in the local size, as of October 15, 2021, this indicator is growing, indicating sustained demand for the dollar from foreign players, who are now profitable to keep the strengthening of the US dollar. This mood prevails among foreign participants, especially because the Federal Reserve, following a meeting on November 3, 2021, slashed the quantitative easing (QE) program, which, among other things, is hurting bitcoin in the medium to long term.

I would also like to draw your attention to the fact that a new strain of COVID-19 could disrupt the Fed’s plans to slow down the “printing press.” Given that a specific part of the US dollar’s growth rested on, among other things, expectations that the Fed would step up the pace of the end of the stimulus program, such negative news may lead to particular uncertainty.

To sum up, it must be said that I wouldn’t want you to feel that the method we have reviewed works 100% and without fail. I want to convey to the community that historical data for a particular asset and the methods to compare it is always of great value. In this regard, we need to watch the correlation between bitcoin and the US dollar, as it allows us to build some kind of defensive response system to protect our investment (trade) positions.

This is a guest article by Virtual Baro. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.