There is a common belief that when the US dollar falls relative to other major global currencies, as measured by the Dollar Force Index (DXY), the impact on Bitcoin (BTC) is positive and vice versa.
For example, the DXY Index fell from 103.0 in January 2017 to a low of 92.6 in August 2017, while Bitcoin rose from $1,000 to $4,930 in the same period. But is there enough evidence to justify a 2016-17-like bull run, as some analysts argue?
But is there enough evidence to justify a 2016-2017 bull run, as some analysts argue?
Is the Bitcoin-Dollar Reverse Trend Real?
Traders and influencers frequently warn about this negative correlation and how a DXY reversal will likely drive the price of Bitcoin higher.
Investment research @GameofTrades_ recently published a chart showing the pattern in early 2023 and then repeating itself in late May. There is some indisputable evidence of the inverse correlation there.
Bitcoin and DXY have been negatively correlated to date in 2023 pic.twitter.com/VTePX3PNs6
โ Game of Trades (@GameofTrades_) June 22, 2023
Additionally, technical analyst el_crypto_prof features a bearish โGaussian Channelโ reversal on the DXY chart which, according to the analysis, coincided with two previous bull runs for Bitcoin and altcoins in 2016-17 and 2020-21.
The DXY (US Dollar Index) has changed color from green to red in the Gaussian channel.
The last two times this happened, $BTC and Altcoins experienced a bullrun (parable) in the following months (2016-2017 and 2020-2021).
Sounds exciting, right? pic.twitter.com/kHJeM6iZDH
โ โ (@el_crypto_prof) June 26, 2023
BTC-DXY correlation varies over time
The seemingly inverse relationship between Bitcoin and DXY has never lasted more than 7 weeks. The correlation indicator ranges from -100%, indicating that certain markets are moving in opposite directions, to 100%, indicating that the movement is in sync; 0 represents a complete lack of correlation between the two assets.
The metric has been negative for 81% of the last 670 days, indicating that DXY and Bitcoin have generally been in a reverse trend. Still, that's not how the correlation metric works, because readings between 0% and -50% denote a lack of correlation.
In fact, the longest period of a correlation below -50% has been 47 days as of August 18, 2022. Therefore, to say that Bitcoin has an inverse correlation with the DXY index would be statistically inconsistent, since was: 50% or less for less than one-third of the days since September 2021.
Between June 2021 and November 2021, the price of DXY and BTC followed a very similar pattern, as they both went up during that five-month period.
However, events uniquely relevant to cryptocurrency could have distorted the metric, such as the First US Bitcoin Futures Exchange Traded Fund release on October 19, 2021.
But regardless of the reason behind the move, correlation is not causation, which means it is impossible to conclude that DXY's positive performance affected Bitcoin's price over the period.
Related: Will the price of Bitcoin skyrocket with the BlackRock ETF?
Longer term analysis is still required for DXY
Although 20-day correlation data is frequently used by analysts and market influencers to explain daily price fluctuations, a longer time frame is required to understand any potential effects, if any, of DXY on the price of Bitcoin.
For example when the US Federal Reserve injects trillion-dollar stimulus packages into the economy, the impact on inflation and global currency flows will most likely take a couple of weeks. After all, not all families, businesses, and financial institutions will put money into circulation right away.
But the price signals in the Bitcoin market are more immediate, since the coins are traded 24/7. Therefore, price movements are extremely susceptible to news, macroeconomic data, and geopolitical events, with effects reverberating for weeks and even months.
A perfect example can be demonstrated with the loss of 38% of Bitcoin in nine days on June 8, 2022.
Notice how it took almost 4 months for the DXY Index to go from 102.50 to the peak of 114.2 at the end of September 2022, even though Bitcoin had already bottomed out at $18,900 much earlier.
DXY a poor proxy for the price of BTC
In other words, those betting on the DXY index reversal preceding a BTC price rally have no statistical support as the correlation varies over time.
Furthermore, even when the inverse correlation occurs, there can be a gap between the immediate Bitcoin price action and the long-term trends of the Dollar Strength Index.
Whenever favorable (or unfavorable) developments occur in the cryptocurrency industry, the historical correlation becomes irrelevant. That could have been the case that impacted Bitcoin's recent gains, which cannot be directly attributed to the alleged "Gaussian Channel" reversal on the DXY chart.
Ultimately, picking out two or three instances of DXY index inverse correlation while a cryptocurrency bull run occurred in the past is not enough to call a bull run similar to 2016โ17, considering the multiple instances of positive correlation and gaps between both active. ' price action.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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