The correlation between Bitcoin (BTC) and the U.S. dollar, as measured by the Dollar Strength Index (DXY), has often been seen as an inverse relationship. However, historical data suggests that the disconnect between the Dollar Index and Bitcoin’s price does not necessarily indicate an imminent major rally for BTC.
While there have been instances where a decline in the DXY corresponded with a surge in Bitcoin’s value, such as in 2017 when Bitcoin rallied from $1,000 to $4,930, it is essential to consider whether there is enough evidence to support a similar bull run. Traders and influencers frequently discuss this negative correlation, suggesting that a reversal of the DXY could push Bitcoin’s price higher.
Recent charts posted by investment research account @GameofTrades_ and technical analyst @el_crypto_prof show patterns indicating an inverse correlation between Bitcoin and the DXY. However, it is crucial to note that this correlation can fluctuate over time, lasting no more than seven weeks. The correlation metric ranges from -100% to 100%, with negative values indicating opposite movements and positive values suggesting synchronized movements. A reading of 0 denotes no correlation.
Interestingly, the longest period of correlation lower than -50% occurred for only 47 days, making it statistically incoherent to claim a consistent inverse correlation between Bitcoin and the DXY index since September 2021. Notably, events specific to the cryptocurrency market, like the launch of the first U.S. Bitcoin futures exchange-traded fund in October 2021, may have influenced the correlation metric.
Moreover, it is important to understand that correlation does not imply causation. While Bitcoin and the DXY may exhibit an inverse correlation during certain periods, it is challenging to conclude that the DXY’s performance directly impacts Bitcoin’s price.
To comprehend any potential effects of the DXY on Bitcoin’s price, longer-term analysis is required. While stimulus packages injected by the U.S. Federal Reserve may take weeks to impact inflation and global currency flows, Bitcoin’s price movements are more immediate due to continuous trading. The cryptocurrency market is highly susceptible to news, macroeconomic data, geopolitical events, and other factors that can generate reverberating effects for weeks or even months.
As a result, relying solely on the DXY index reversal as a precursor to a Bitcoin price rally lacks statistical support. The correlation between Bitcoin and the DXY varies over time, and even when an inverse correlation occurs, there may be a gap between Bitcoin’s immediate price action and the longer-term trends of the Dollar Strength Index. Recent gains in Bitcoin cannot be solely attributed to the supposed “Gaussian Channel” reversion on the DXY chart.
Ultimately, cherry-picking a few instances of inverse correlation between the DXY and Bitcoin is insufficient to predict a bull run similar to the one seen in 2017. It is crucial to consider the multiple instances of positive correlation and gaps in price action between the two assets.
Please note that this article is for general information purposes and does not constitute legal or investment advice. The views expressed here are the author’s alone and do not necessarily reflect those of Cointelegraph.