Bitcoin (BTC) has seen a decline of 12% since March 2, when it came close to hitting $94,000. Interestingly, during this same timeframe, the US dollar has weakened against a range of foreign currencies, which typically bodes well for scarce assets like Bitcoin.
Investors are now left wondering why Bitcoin hasn’t responded positively to the slipping DXY and what potential factors might trigger a shift from this trend.
Historically, up until mid-2024, the US Dollar Index (DXY) exhibited an inverse relationship with Bitcoin’s price, meaning that the cryptocurrency frequently gained value when the dollar weakened. Initially, Bitcoin was regarded as a hedge against inflation, largely due to its independence from the stock market and its fixed monetary policy, akin to digital gold.
However, correlation does not equate to causation, and the past eight months have illustrated that the reasoning for investing in Bitcoin can shift over time. Some analysts argue that Bitcoin’s price is influenced by global monetary supply shifts as central banks modify their economic strategies, while others highlight its significance as a form of uncensorable money, allowing unrestricted transactions for both individuals and governments.
### Bitcoin’s Reaction to DXY Weakness May Take Time
Julien Bittel, head of macro research at Global Macro Investor, observed that the DXY Index has only dropped from 107.6 on February 28 to 103.60 on March 7 three times in the last twelve years.
Bittel’s analysis underscores that after the previous significant dip in the DXY Index in November 2022, Bitcoin’s price surged, as it did following the March 2020 event when the dollar declined from 99.5 to 95 during the early onset of the COVID-19 pandemic. He emphasizes that “financial conditions lead risk assets by a couple of months,” and notes that financial conditions are currently easing rapidly.
While Bittel’s insight is generally optimistic for Bitcoin’s pricing, the benefits historically derived from past weaknesses in the dollar took more than six months to manifest, and, in some instances, like during the 2016-17 cycle, even a couple of years. The recent underperformance of Bitcoin may stem from “short-term macro fears,” as noted by an analyst.
The analyst pointed to several factors contributing to Bitcoin’s recent price struggles, including tariffs, the Dogecoin influence, yen carry trades, yield changes, the DXY, and growth anxiety. However, the conclusion remains that none of these elements fundamentally alter Bitcoin’s long-term prospects, suggesting that its value will eventually rise.
For instance, cuts from the US Department of Government Efficiency are expected to positively influence the economy over time by lowering overall debt and interest obligations, allowing for increased investment in productivity-enhancing initiatives. Additionally, tariffs might be advantageous if effective trade negotiations lead to a better balance, enhancing US exports and fostering sustainable economic growth.
The measures enacted by the US government have managed to curtail unsustainable growth, creating short-term disruptions while simultaneously reducing yields on US Treasury securities, which makes refinancing debt more affordable. Nonetheless, there’s no evidence that the US dollar’s status as the leading global reserve currency is in jeopardy, nor has demand for US Treasuries diminished. Thus, the recent DXY decline does not appear to have a direct impact on Bitcoin’s attractiveness.
Over time, as noted, macroeconomic anxieties are likely to diminish as central banks pivot to more expansionary monetary policies aimed at boosting economies. This might set the stage for Bitcoin to detach from the DXY Index and potentially reach new all-time highs by 2025.
This article is meant for informational purposes only and should not be construed as legal or investment advice. The views expressed are solely those of the author and do not necessarily represent those of any organization.