How will a stronger dollar impact the crypto market?

The US dollar is stronger than it’s ever been in decades, thanks to the American Federal Reserve System adopting a hawkish monetary stance in the face of skyrocketing inflation. Unfortunately, the side effect of the strengthening dollar is the increasing devaluation of other world currencies. Currencies like the Euro, Yen, Pound, and more have plummeted to their lowest value against the dollar in years.

Because a stronger dollar has obvious effects on other fiat currencies, it’s worth asking what will happen to cryptocurrencies. Will the sinking value of fiat currencies drive people to invest in Bitcoin and Ethereum? Or will people be spurred to put all of their money into US dollars instead?

Looking at crypto performance

The first indication that people aren’t running to crypto as an inflation hedge is the fact that cryptocurrencies aren’t exactly performing too well. In the time that the US dollar surged about 20% and achieved a 20-year high, bitcoin dropped a whopping 58% in value. Additionally, the CoinDesk Smart Contract Platform Index — which includes the likes of ether (ETH), Cardano’s ADA, and Solana’s SOL — tumbled 19.8%.

The fact that crypto’s value has dropped alongside other fiat currencies has shot holes in the belief that crypto is a good inflation hedge.

The upside

Yet cryptocurrency’s downward performance hasn’t been a cause for concern for its most ardent supporters.

For one, others have pointed out that crypto is still a relatively new asset class and its performance is tied to many other factors besides the strength of the US dollar. Bitcoin, for example, has seen its value fluctuate whether the legislations were passed by world governments. Ether was recently affected by its recent event, where it also switched consensus protocols.

Not all digital assets are experiencing dips, either. A notable exception to the phenomenon is the performance of US-dollar backed, regulated stablecoins like USDC and BUSD. Because every single unit of these stablecoins is backed by the presence of an actual dollar (maintaining a 1–1 peg), they’ve also performed relatively well. The stablecoins have gone up the same way that the dollar has.

Stablecoins are even making digital dollars accessible in parts of the world with high inflation and unmet dollar demand, further helping the dollar maintain its strength. With stablecoin, people in places with high inflation can choose to put their money in something backed by the world’s strongest currency.

The bigger picture

Overall, cryptocurrencies as a whole have not performed as well against the dollar as many would’ve hoped. Yet it’s still far from cause for panic — many factors go into why the value of coins like Bitcoin and Ethereum have dipped. It’s everything from regulations to switching consensus mechanisms.

The good news is that those hoping to see a stronger cryptocurrency can easily turn to dollar-backed stablecoins. Holding these stablecoins is just easy as holding other cryptocurrencies. For example, many exchanges make sure to carry BUSD, USDT, USDC, or Dai alongside top coins like Bitcoin and Ether. Even startups like Pundi X make sure that its crypto-based point of sales machines (known as the XPOS) support stablecoins too.

Because stablecoins are so accessible now, whether its through exchanges or innovations like the XPOS, it’s unlikely that people will abandon cryptocurrency outright. The coin people choose to hold may be different, but it’s still a relevant market nonetheless.