There is a prevailing belief that when the U.S. dollar weakens compared to other major global currencies, as indicated by the Dollar Strength Index (DXY), it has a positive impact on Bitcoin. Conversely, when the dollar strengthens, Bitcoin tends to experience a decline.
For example, during January 2017, the DXY index fell from 103.0 to a low of 92.6 in August 2017, while Bitcoin witnessed a significant rally from $1,000 to $4,930 within the same timeframe. However, the question remains: Is there sufficient evidence to support the notion of a bull run similar to the one observed in 2016-2017, as some analysts suggest?
The Need for Long-Term Analysis: Assessing DXY’s Impact on Bitcoin
The Importance of a Longer Time Frame: Understanding DXY’s Impact on Bitcoin’s Price
While analysts and market influencers often rely on 20-day correlation data to explain daily price fluctuations, it is crucial to consider a more extensive period to grasp any potential effects, if any, of the Dollar Strength Index (DXY) on Bitcoin’s price.
For instance, when the U.S. Federal Reserve injects trillion-dollar stimulus packages into the economy, it takes time for the impact on inflation and global currency flows to materialize. It is not an immediate process, as families, businesses, and financial institutions may not put the money into circulation right away.
On the other hand, the Bitcoin market operates 24/7, making its price signals more immediate. Price movements are highly susceptible to news, macroeconomic data, and geopolitical events, which can have reverberating effects for weeks or even months.
A clear example of this can be seen in the 38% loss that Bitcoin experienced over nine days on June 8, 2022. It is worth noting that it took nearly four months for the DXY index to move from 102.50 to its peak of 114.2 by late September 2022, even though Bitcoin had already reached its bottom at $18,900 long before that. This demonstrates the time lag and complexity involved in examining the relationship between DXY and Bitcoin’s price dynamics.
The Limitations of Using DXY as an Indicator for Bitcoin’s Price
The Flaws of Reliance on DXY for Predicting Bitcoin’s Price Rally
Relying on the Dollar Strength Index (DXY) as a predictor of Bitcoin’s price rally lacks statistical support, as the correlation between the two varies over time.
Furthermore, even when an inverse correlation does occur, there may be a discrepancy between Bitcoin’s immediate price movement and the longer-term trends of the DXY.
The occurrence of favorable or unfavorable developments within the cryptocurrency industry can render historical correlations irrelevant. Recent Bitcoin gains, for instance, cannot be solely attributed to a supposed “Gaussian Channel” reversion on the DXY chart.
Simply cherry-picking a few instances of inverse correlation between the DXY index and cryptocurrency bull runs in the past is insufficient evidence to predict a bull run comparable to the one witnessed in 2016-2017. It is important to consider the multiple instances of positive correlation and gaps between the price actions of both assets.