The Capital
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The Capital

USD Index Provides Clues Into The Next Big BTC Move?

Bitcoin is going to $100,000 this year and that’s a conservative estimate. However, could foreign exchange markets give clues as to when bitcoin might take off to the next big level?

When you’re knee-deep in crypto, it’s easy to overlook various situations in the traditional financial world. But now more than ever, crypto does not operate in a vacuum and one narrative that’s hard to miss is FX (foreign exchange) given that a large chunk of the bitcoin narrative is predicated on its demise.

Institutional investors, many of whom hail from hallowed antiquity, have fully embraced the BTC narrative and liken it to the 70’s gold-era trade (as explained by Paul Tudor Jones). Of course, there are various other narratives at play, but this one is worth paying attention to due to the sheer amount of publicity and veneration it has received.

For those unfamiliar, the narrative goes something like this: USD is being debased via fiscal deficits and easy monetary policy, which are the global status quo. These policies are inflationary, reducing the Dollar’s purchasing power. As such, holders of the USD will look for assets that will preserve their purchasing power. Bitcoin, which is deflationary, is one such asset. Its properties serve a similar function to gold and in many ways, it is a substitute for gold, and the industry is awash with arguments for both its technical and fundamental superiority to the shiny rock (by virtue of being programmable, digital, absolutely scarce, etc.).

This narrative is in part based around sustained Dollar weakness over time. As such, when the USD underperforms relative to other currencies, this lends credence to the narrative, and the thesis and price-action align. Unfortunately, this can also have the effect of making bitcoin bulls delirious, forcing billions in liquidations as evidenced this week.

These price movements are observable on both the DXY or the Dollar Index and the EUR/USD pair which is inversely correlated with the DXY. Put simply, if the DXY goes up, EUR/USD goes down, and vice versa.

As pointed out in a Twitter post, bitcoin also tends to be somewhat correlated to DXY movements. In fact, DXY weakness often provides tailwind for bitcoin price appreciation, while Dollar Index strength creates headwinds for bitcoin, per the below 4-hour chart.

In a post on Twitter and on LinkedIn, I mentioned that this correlation should not continue to hold water over time, in large part because I genuinely think that paper money has zero intrinsic value and my conviction on this has not changed after seeing my net worth fluctuate 80%-90% several times over the last few years. I’ve adjusted my strategy since but the bulk of my portfolio remains in hodl-lockdown, as telegram readers know.

In any case, I’m under no illusion that the market has not come to the same conclusion yet, so it’s worth paying attention to boomer markets to gauge when bitcoin might face more headwinds.

#DXY macro relief rally in the first quarter of 2021 (before resuming the downtrend).

- Chris on Crypto (@ChrisOnCrypto1) December 10, 2020

In December, I mentioned that a Q1 bounce on the DXY is possible as the Dollar takes a breather before trending lower. This thesis has not changed and might stall bitcoin for several weeks.

A new US administration is about to take the reins just as the DXY is close to its macro pivot and the EUR/USD has also reached an inflection point (though these could be seen as one signal).

While the incoming administration has already delineated that there are no plans to change course in terms of monetary policy, it’s prudent to respect the charts especially when it aligns with a change in administration for the largest economy in the world.

Clearly, it’s worth paying attention to this narrative, even though there is ultimately very little a new administration can do to stop dollar-devaluation on a longer-timeframe.

Technically speaking

DXY strengthens as BTC stalls?

On Monday, I outlined several basic possible entries for bitcoin as it began to slide further and further into the red.

However, bearing in mind that my crystal ball needs polishing (it always does), let’s delineate a more middle-of-the-road scenario which seems more probable now that new information is available.

Bitcoin tested the 20-daily EMA ($32,765) twice this week and has successfully bounced thus far as bulls brute-forced their ‘you shall not pass’ dogma on bears — which is always a welcomed sight to behold.

On lower time-frames, bitcoin is trading in a side-ways fashion with little follow-through from sellers, who through no fault of their own (or otherwise) are attempting to push prices lower.

This does not appear to be happening, and momentum to either side is fleeting unless crucial levels are taken out.

If bears fail to show up, then bulls will take the reins once again and we all know how that story ends.

However, in light of the close DXY inflection point, that momentum might lose steam sooner than expected resulting in a stalled market for several weeks.

After such a parabolic run-up, this is arguably the best-case scenario for even higher prices sometime in February or March.

On the flip side, if the 88-point macro DXY inflection point does not hold, then we can expect more green vertical lines on the bitcoin chart.

Of course, it wouldn’t be the COC newsletter if I didn’t remind you that bitcoin is going to at least $100,000 this year.

On a side note, the reason why I changed my price-prediction from $50,000 to $100,000 (minimum) last year was because of bitcoin’s performance when it sliced through $20,000 like butter. If the conditions change, you need to adjust with them. All my price predictions are the most conservative estimates.

Stay tuned.

Bulls lead the way.

Catch you next time.

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