- The US Dollar Index plummeted as hopes around the end of the Fed’s rate hikes peaked.
- The weakening inverse correlation meant that issues relevant to the movement of the US dollar would have little meaning for BTC.
Historically the world’s most valuable digital asset Bitcoin[BTC] has been found to be negatively pegged to the US dollar (USD). This essentially means that if the price of one asset rises, the other asset falls and vice versa.
However, this relationship has largely disappeared by 2023. According to the crypto market data provider Kaikothe inverse correlation between BTC and the USD dropped from -61% to -10 year-over-year (YTD), which was almost negligible.
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Negative correlation peaked in 2022
The US Dollar Index (DXY), prepared by the US Federal Reserve, is a relative measure of the strength of the USD against a basket of six foreign currencies. Investors view the dollar index as a reliable tool for assessing US economic growth and demand for dollars.
Rate hikes by the Fed put significant upward pressure on DXY as the policy results in increased dollar demand from foreign investors.
In 2022, the dollar index outperformed other currencies, rising to a two-decade high of 114.18 in September as the US central bank resorted to large hikes to bring down inflation. DXY has strengthened by more than 8% in 2023, according to TradingView.
Contrary to the trajectory above, the broader crypto market was battling the punitive bear phase around the same time. Bitcoin crashed to a low of $16,000 and lost nearly 65% of its value in 2o22.
A wave of implosions eroded user confidence in the crypto market and BTC in particular, leading to capital flight to safe havens like the USD. As a result, the negative correlation between the two assets became stronger.
Reversal in 2023
The fate of the cryptocurrency market changed dramatically in 2023 due to a strong uptick. BTC’s price skyrocketed 87% YTD, consolidating around annual peaks at the time of publication.
On the other hand, after moving sideways for much of the year, the dollar index plummeted to a 15-month low last week. This followed encouraging US inflation data last week, adding to optimism that the Fed’s cycle of aggressive supply increases would eventually come to a halt.
While on a YTD basis the negative correlation has lost momentum, there have been incidents that have highlighted the ups and downs in this relationship.
Think of the US banking crisis in March, exacerbated by the collapse of some of the largest lenders such as Silicon Valley Bank and Signature Bank. During this period, BTC rose by almost 40%. Kaiko had stated that the negative correlation was fading in this market rally.
This temporary hiatus was quick cleared in the following month, when weak US jobs data affected the dollar, resurfacing the negative relationship, albeit at a very low level.
The weakening inverse correlation meant that issues relevant to the movement of the US dollar would have little meaning for BTC. The steady decoupling of macroeconomic triggers, such as US economic statistics, job data or interest rate hikes, allows Bitcoin to be marketed as an independent asset class.
Bitcoin vs gold story
Bitcoin is often referred to as the “digital gold” due to its widespread narrative as a safe haven, similar to the characteristics of its real-world counterpart. However, the performance of the two assets in 2023 showed an intriguing picture.
While BTC, as mentioned earlier, saw an impressive 87% growth, gold [XAU] could only manage gains of about 8% YTD.
Read Bitcoin [BTC] Price Forecast 2023-24
To put things in perspective, Bitcoin’s growing value relative to gold meant that the market could prefer the king coin over the precious metal as a hedge against inflation.
However, given BTC’s reputation as a volatile asset, investors should take this development with a grain of salt. With the wider crypto market suffering from US regulatory animosities, BTC gains could be quickly reversed in 2023.