At present, there seems to be a general assumption that when the value of the US dollar rises against other major world currencies, as measured by the DXY index, the impact on Bitcoin (BTC) is negative.
In recent weeks, analysts and influencers have been launching alerts on this inverse correlation, which was verified until March 2021.
So I guess we’re not all obsessed with $ DXY more? Because it looks super bullish and has provided a near perfect reverse correlation for over a year. Either way, we’re about to find out if $ BTC has matured to the point of being decorrelated. ️ #Banks #Brrrr #Bitcoins pic.twitter.com/gequzmr6p2
– Alex Saunders (@AlexSaundersAU) February 2, 2021
– Henrik Zeberg (@HenrikZeberg) January 2, 2021
However, it doesn’t matter if you follow a 20 or 60 day correlation, the situation has turned around in the last three months.
The correlation indicator (red) has been sitting above 50% since mid-March, indicating that DXY and Bitcoin have generally followed a similar trend.
The dollar strengthened after the Fed’s speech
As Cointelegraph reported, the May Consumer Price Index (CPI) report showed inflation to have peaked in 13 years, and Federal Reserve Chairman Jerome Powell acknowledged that inflation could be higher than expected in the short term. Still, he clarified that “long-term inflation expectations are anchored in a place consistent with our objective.”
The market gave the Fed a “vote of confidence,” causing the US dollar to appreciate against major world currencies. Meanwhile, Bitcoin fell 8% to a low of $ 35,300 on June 18, further strengthening the reverse correlation thesis.
Related: Forget Elon, Here’s Why Bitcoin Traders Should Look At The U.S. Dollar Index Instead
Correlation is a longer term indicator, not an intraday metric
Even though experts and influencers like to dissect these events and extrapolate the movements to 1 day, one needs to analyze a longer period to understand the potential impacts of the DXY index on the price of Bitcoin.
Notice how both markers weakened in May, after a relatively stable period at the end of April. At least it seems premature to call the recent decoupling an inverse correlation. Several forces could be behind Bitcoin’s failure to maintain $ 40,000 support on June 16 and the price correction that followed.
To begin with, Liu He, Chinese Vice Premier and member of the all-powerful eight-person political bureau, led a meeting on financial risk prevention and control on May 24. Among the decisions was a crackdown on Bitcoin mining and trading activities.
Bitcoin’s hash rate has fallen to its lowest level since November 2020 as miners begin to move away from China. Huobi has temporarily suspended trading of futures contracts with Chinese users, while the futures platform Bybit has revealed that it has closed accounts registered with Chinese phone numbers.
In addition, on May 26, the Chairman of the United States Securities and Exchange Commission, Gary Gensler, said regulators were eager to work with other regulators and Congress to close the gaps in investor protection on crypto markets.
Therefore, potential US regulation and China’s current crackdown on mining and trading activities appear central to Bitcoin’s recent underperformance. Once these issues are no longer threats, the gap created by DXY’s positive move may narrow.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade move involves risk. You should do your own research before making a decision.