Currently, there seems to be a widespread assumption that when the value of the US dollar rises against other major world currencies, as measured by the DXY index, the impact on Bitcoin (BTC) is negative.
Traders and insiders have been warning about this inverse correlation, and how the eventual reversal of the move would likely drive Bitcoin price higher.
Analyst CryptoBullGems recently reviewed how the DXY index looks overbought after its relative strength index (RSI) topped 78 and could be the start of a pullback for the dollar.
This is literally the only thing you need to look at:
the $DXY is crazy overbought right now and due to a correction. $BTC is the most oversold it ever has been on the monthly timeframe.
BITCOIN AND THE DOLLAR SHARE AN INVERSE CORRELATION. $BTC will rise and fiat will fall. pic.twitter.com/MpZniivpj0
— The London Crypto (@SerLondonCrypto) September 6, 2022
Furthermore, the technical analyst, 1coin2sydes, presents a bearish double top formation on the DXY chart, while simultaneously Bitcoin forms a double bottom, a bullish indicator.
Very beautiful Inverse Correlation between the Dollar Index DXY and Bitcoin BTC!
Ace #DXY forms a Double top (which maybe a reversal of its Trend) – Heading Down!#BTC forms a Double Bottom (which may also serve as a trend reversal) – Heading UP!#2sydes pic.twitter.com/A4eZSfJG82
— 2sydes.eth (,) (@1coin2sydes) September 12, 2022
The correlation changes over time, despite the general inverse trend
The periods of inverse movements between Bitcoin and DXY have never exceeded 36 days. The correlation metric ranges from -1, which means that the selected markets move in opposite directions, to +1, which reflects a perfect, symmetrical move. A disparity or lack of relationship between the two assets would be represented by a 0.
The metric has been below negative 0.6 since Aug. 19, indicating that both DXY and Bitcoin have generally followed a reverse trend. In fact, the longest period of inverse correlation has been from April 14 to May 20.
To say that Bitcoin is inversely correlated with the DXY index would be statistically incoherent as it was -0.6 or lower on less than 30% of days since 2021.
The dollar strengthened after the FOMC minutes
On August 17, US Federal Reserve officials indicated that further interest rate hikes would be necessary until inflation slowed substantially, according to minutes of the July 27 meeting.
The report caused the US dollar to appreciate against major global currencies as the market gave the Fed a vote of confidence. Meanwhile, Bitcoin fell 11% in two days to $20,800, reinforcing the Fed’s thesis. inverse correlation.
Still, correlation does not imply causation, meaning it is impossible to conclude that the positive performance of DXY negatively impacted the price of Bitcoin after the Federal Reserve meeting minutes were released.
Correlation should not be used to predict short-term movements
Although pundits and influencers often use 20-day correlation data to explain daily price movements, a longer time frame should be looked at to understand the potential impacts of DXY on Bitcoin price.
For example, 2021 featured some positive correlation between the dollar index and Bitcoin. Perhaps some of the moves were anticipated by either party, but prolonged periods of inverse correlation did not occur.
More importantly, events that only affect cryptocurrency could have distorted the metric, such as the launch of the first Bitcoin exchange-traded fund in the US on October 19, 2021. Other examples are the announcement by Tesla’s share of a $1.5 billion investment in Bitcoin on February 8, 2021.
Additionally, analysts point to the Chinese crackdown on mining in May 2021 as the culprit behind the market’s plunge below $40,000. Those events could not have been anticipated by the DXY dollar index, so any ongoing correlations could have had little impact during those periods.
Additionally, analysts point to the Chinese crackdown on mining in May 2021 as the culprit behind the market’s plunge below $40,000. Those events could not have been anticipated by the DXY index, so any ongoing correlations could have had little impact during those periods.
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