2020: Why Bitcoin Is Inversely Correlated With the US Dollar

2020年10月13日

There is no doubt that Bitcoin and the overall crypto market has some correlation with the stock market, with market experts remarking that Bitcoin has been surging in tandem with traditional markets for awhile over the past year or so. Extensive research has already been conducted by market experts to study the seeming correlation of both markets, but I would like to take my stab at it as well, but from the US Dollar correlation perspective. Investors should be aware of the close inverse correlation between the strength of the US dollar and Bitcoin.

A widespread debate among investors is the correlation of Bitcoin (BTC) with other markets. In other periods, gold and Bitcoin appear to be moving in tandem. However, the correlation that needs to be monitored most closely is that of the dollar, as the global economy is based on the strength or weakness of our global reserve currency, the US dollar.

Bitcoin and Cryptos as assets:

The US dollar is the de facto world currency, thus the value benchmark for everything else, including assets and other fiat currencies. A lot of financial activities are based on US dollars like loans and settlements, which no doubt increase requirements and adoptions of US dollars (In a negative word, US dollar colonization). When the world lacks a supply of US dollars, everything else will fall in price in reference to US dollars. If the US dollar is stable, then the crypto prices may have become influenced by the monetary policies of other currencies. For example, there is very high inflation in Argentina, so the general public would like to exchange their Argentine pesos for Bitcoin, to reduce the risk of inflations.

Although Bitcoin and other cryptocurrencies can function like currencies, like payment and store of value, the market cap of cryptocurrencies is quite small compared to traditional finance, and most financial activities are based on fiat money. After all, you can't borrow Euro, then pay back Ethers. Typically you need to pay back Euro. In other words, the financial inclusion of cryptocurrencies is not enough. If bitcoin and other cryptocurrencies replace more traditional financial functions, which may reduce the role of the US dollar and other fiat money, the relationships between Bitcoin and other fiat money will be different.

For most of Bitcoins’s young life, the correlation between the cryptocurrency and the S&P 500 was largely negative—until the 2017 bull run (when Bitcoin’s skyrocketing notoriety seemingly invited a host of new investors, many of whom had their hands in other markets).

What I believe:

I believe that since the US dollar is now standing at the frontlines of support, and testing it twice, we can see some form of recovery within the US dollar, especially with Trump miraculously being tested negative again, and now also going into elections - which makes people want to carry more cash while the stock market remains volatile. People will be looking for a hedge, whether it is gold or Bitcoin, we also can't take out the fact that cash is also king. In the chart above, we can clearly see the inverse correlation between Bitcoin and the US dollar. For example, the COVID19 crash led to the USD rise immensely high in preparation for a possible recession caused by this pandemic (stocks also plummeted). After a miraculous recovery, we saw the US Dollar bleed slowly and also saw a clear recovery in the stock market, bringing Bitcoin along with it up.

From a pure technical standpoint, we can see that Bitcoin has broken down our legacy trend line, and is now retesting the resistance twice, while the US dollar retests the support for a second time.

With all of these considered, we can assume that Bitcoin will have some form of correction, while markets remain volatile and cash driven investors will liquidate their investments in preparation for a hedge.

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