There has been a long-standing belief that there is an inverse correlation between the U.S. dollar and Bitcoin. When the value of the U.S. dollar declines, it is often believed that the price of Bitcoin rises, and vice versa. However, is there enough evidence to support this claim? Some analysts argue that there is, pointing to historical data and technical analysis.
One investment research, GameofTrades_, posted a chart on Twitter showing the inverse correlation between Bitcoin and the Dollar Strength Index (DXY) in early 2023. This chart provides some evidence to support the belief in an inverse correlation between the two assets. Additionally, a technical analyst named el_crypto_prof presented a bearish change on the DXY chart, which matched previous bull runs in Bitcoin and altcoins.
However, it is important to note that the BTC-DXY correlation varies with time. The correlation indicator ranges from -100% to 100%, with -100% indicating opposite movements and 100% indicating lockstep movements. The metric has been negative for 81% of the past 670 days, suggesting an inverse trend between Bitcoin and the DXY index. But this does not mean that the correlation is consistently negative, as readings between 0% and -50% indicate a lack of correlation. In fact, the longest period of correlation lower than -50% has been 47 days.
There have been instances where the DXY and Bitcoin price moved in a similar pattern, such as between June 2021 and November 2021. However, it is difficult to determine whether the positive performance of DXY directly affected the price of Bitcoin during that period. Other factors, specific to the cryptocurrency market, may have influenced the metric.
It is important to remember that correlation does not imply causation. Just because there have been instances of inverse correlation between Bitcoin and the DXY index in the past does not mean that it will always hold true. Additionally, the price movements of Bitcoin are highly influenced by news, macroeconomic data, and geopolitical events, making it susceptible to short-term fluctuations.
In conclusion, while there may be some evidence to support the belief in an inverse correlation between the U.S. dollar and Bitcoin, it is not a reliable indicator for predicting the future price movement of Bitcoin. The correlation between the two assets varies over time, and other factors can override this relationship. Therefore, it is not enough to solely rely on the DXY index when making investment decisions regarding Bitcoin.