Bitcoin and the DXY: Possible Scenarios

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Coinmonks

4 min readApr 26, 2022

The cryptocurrency market has been lacklustre recently, and one reason is perhaps due to the US Dollar Index (DXY). Hence, it is important to track the movement of the DXY to provide us with a clearer macro view on where the cryptocurrency markets may be heading to in the future.

What is the DXY?

The DXY is measured against a basket of foreign currencies like the Euro. Essentially, a rise in the DXY value means that investors are choosing to hold cash instead of riskier assets such as stocks or crypto, representing a risk-off environment. When the DXY drops, it means that investors are switching from DXY to more risky assets, signifying a risk-on environment.

Currently, the DXY is in a strong uptrend on the weekly timeframe, as seen in the image below. The resistance zone has been marked out, which corresponds to the prices at which the DXY valuation topped out, once in 2017 and in 2020. Those reverses in the DXY valuation corresponded to the 2017 and 2020 crypto bull markets.

Crypto vs DXY

Usually, cryptocurrency prices move opposite to the DXY. That is, if the DXY goes up, crypto prices drop. If the DXY drops, crypto prices go up. The reason for this is because as stated earlier, the DXY represents market sentiment in the market. Presently, with uncertain global situations and economic tightening measures being implemented worldwide, now is not the most conducive environment for investment. Therefore, investors become risk-off and turn to cash, which is traditionally seen as one of the safest assets.

As investors hold more US Dollars, less is being spent on other investments such as crypto and stocks, which is why cryptocurrency prices are being hit so hard. That being said, the DXY is currently running into resistance. Will this mean that the DXY is going to reverse and allow crypto to have another run soon?

Possible Scenarios:

One scenario is if the DXY gets rejected off the resistance and subsequently drops. This will be great news for crypto, as it signifies that investors are becoming more confident and are more willing to pour money into riskier assets like crypto, This is definitely possible, given that the DXY resistance has not been broken in more than a decade (the last time the DXY was above 104 was in February 2003). With the supply of the USD still at all-time-highs, many investors believe that the DXY will get rejected firmly, Indeed, this is a possible scenario.

The other side of the story is that if the DXY somehow manages to break through the resistance, that is going to spell bad news for crypto. As of right now, the US Fed has announced rate hikes of 0.5% a month in May, which has not been seen since the Dot Com Bubble. On top of that, the Fed also announced quantitative tightening measures, which is the Central Bank’s selling of bonds and assets to reduce the balance sheet. These present economic conditions differ greatly from those of 2017 and 2020, where rate hikes were less aggressive in 2017 and absent in 2020. Furthermore, quantitative tightening measures now are also more aggressive than in 2017, where the Fed is aiming to clear off $95 billion of assets off balance sheets every month presently, compared to about $30 billion a month in late 2017. Therefore, it is possible that the vast demand for USD may push the DXY above and beyond the resistance. This will spell bad news for crypto and it is important for investors to have a plan for this worst case scenario.

Conclusion:

All in all, the DXY is inversely correlated to cryptocurrency prices. With rising interest rates, it remains to be seen when the DXY will reverse and drop. It all comes down to how aggressive tightening measures are compared to the supply of the USD (basic economics). Therefore, look out for any news for less aggressive tightening measures. That will be bullish for cryptocurrencies and markets in general.

Under such uncertain economic conditions, it is prudent to be prepared for both scenarios. Even if we personally want cryptocurrency prices to go up, we must be prepared for the worst. Therefore, this article has taken a quick look at both sides of the story to provide an impartial view on the market. Please share your thoughts and opinions below. Do you think the DXY will continue to go up or will it get rejected off the resistance?

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Bitcoin and the DXY: Possible Scenarios

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Written by CoinMenorah