There has long been a belief that when the U.S. dollar weakens against other major global currencies, it has a positive impact on Bitcoin. Conversely, when the dollar strengthens, Bitcoin tends to decline in value. This theory is often supported by looking at the Dollar Strength Index (DXY) and Bitcoin price movements. For example, when the DXY index dropped from 103.0 to 92.6 between January and August 2017, Bitcoin rallied from $1,000 to $4,930. But is there enough evidence to suggest that a similar bull run will occur in the future? Analysts and traders frequently warn about this negative correlation and argue that a reversal in the DXY will push Bitcoin’s price higher.

Exploring the Evidence

Several analysts and influencers have presented evidence to support the inverse correlation between Bitcoin and the DXY index. Investment research firm @GameofTrades_ shared a chart showing a pattern in early 2023 that mirrored previous price movements. Additionally, a technical analyst known as el_crypto_prof identified a bearish “Gaussian Channel” change on the DXY chart that matched previous bull runs in Bitcoin and altcoins. However, it’s important to note that the inverse relationship between Bitcoin and the DXY has never lasted more than seven weeks.

Understanding Correlation Metrics

Correlation metrics range from -100% to 100%, with -100% indicating that two assets move in opposite directions, 100% indicating a lockstep movement, and 0 representing no correlation. Over the past 670 days, the correlation between DXY and Bitcoin has been negative for 81% of the time, suggesting an inverse trend. However, readings between 0% and -50% indicate a lack of correlation. The longest period of correlation lower than -50% was 47 days starting in August 2022. Therefore, claiming that Bitcoin has an inverse correlation with the DXY index would be statistically inaccurate since the correlation was below -50% for less than a third of the days since September 2021.

Considering Market Dynamics

While there may be periods where Bitcoin and the DXY show an inverse correlation, it’s important to recognize that correlation does not imply causation. Events specific to the cryptocurrency market, such as the launch of the first U.S. Bitcoin futures exchange-traded fund in October 2021, may have distorted the correlation metric. Additionally, analyzing short-term correlations, such as 20-day data, fails to capture the potential effects of the DXY on Bitcoin’s price. The impact of trillion-dollar stimulus packages injected by the U.S. Federal Reserve takes time to manifest in terms of inflation and global currency flows. However, the price signals in the Bitcoin market are more immediate due to 24/7 trading, making them highly susceptible to news, macroeconomic data, and geopolitical events.

While there may be instances of inverse correlation between Bitcoin and the DXY index, it is not enough to predict a bull run similar to 2016–17. The correlation between these two assets varies over time, and even when an inverse correlation occurs, there can be a gap between Bitcoin’s immediate price action and the longer-term trends of the DXY. Ultimately, attributing Bitcoin’s recent gains solely to the supposed “Gaussian Channel” reversion on the DXY chart is not supported by statistical evidence. It is crucial to consider the multiple instances of positive correlation and gaps between the price actions of both assets.

Analysis

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