In the ongoing banking crisis in the United States, the US Dollar (USD) appears to correlate directly with Bitcoin.
Bitcoin Positively Correlates With USD
According to Kaiko, a digital assets market provider, Bitcoin, the most valuable cryptocurrency, appears to be moving synchronously with the USD as the market adopts a wait-and-see approach amid fear of further turbulence in the United States financial markets.
Historically, has had an inverse correlation with the U.S. Dollar. Over the past month, this negative correlation has mostly disappeared amid a wider market rally. — Kaiko (@KaikoData)
Historically, Kaiko notes, Bitcoin moves inversely with USD. That means whenever the USD rallies, Bitcoin tends to crumble. This has been observed in the last few months, especially throughout 2022, resulting in what was known as the crypto winter.
As USD strengthened across the board in 2022, crypto prices, including BTC, weren’t spared. To illustrate, Bitcoin crashed from as high as $69,000 registered in November 2021, dropping below $20,000 in November 2022.
The crypto meltdown was made worse by the collapse of UST, an algorithmic stablecoin by Terra, the crash of several centralized finance projects like Voyager Digital and BlockFi, and the spectacular fall of FTX, the Sam Bankman-Fried exchange in November.
The bankruptcy and failure of some of these platforms dented user confidence, forcing a capital flight to safe havens beyond the crypto markets to gold and the USD.
At some point in 2022, for example, DXY data, an index that tracks the USD, showed that the greenback strengthened by over 20%.
During that time, BTC more than halved, demonstrating the relationship between the USD and Bitcoin.
The DXY measures the strength of the USD against a basket of other currencies, including the Japanese Yen, Euro, Chinese Yuan, and others. The index will rise if the USD is strong and dip if it falls relative to these currencies.
The Tide Is Changing
As of mid-March 2023, Kaiko observes that rallying Bitcoin and crypto prices seems to coincide with the relative strengthening of the USD; and is shifting. When BTC prices rose from $19,700 last week to $26,300, the USD added 3% from late February 2023. The USD holds firm despite questions being raised concerning the monetary policy approach adopted by the Federal Reserve.
There have been more questions about the effectiveness and the speed of rate hikes in the past few months. Although inflation is lower, it is not at ideal levels.
The Fed aims to eventually reduce inflation to around the 2% benchmark level. While critics descend on the Fed, the USD is steady, syncing with Bitcoin, that’s relatively higher.