Data challenges DXY correlation with Bitcoin rallies and corrections ‘thesis’

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Currently, there seems to be a general assumption that when the value of the US Dollar increases against other major global currencies, as measured by the DXY Index, the impact on Bitcoin (BTC) is negative.

Traders and influencers have issued alerts about this inverse correlation and how the eventual reversal of the move is likely to drive the price of Bitcoin higher.

Analyst @CryptoBullGems recently looked at how overbought the DXY index looks after its Relative Strength Index (RSI) surged above 78 and could be the start of a retracement for the dollar index.

Additionally, technical analyst @1coin2sydes shows a bearish double top formation on the DXY chart, while simultaneously Bitcoin forms a double bottom, a bullish indicator.

The correlation changes over time, despite the general opposite trend

The periods of reverse movements between Bitcoin and the DXY index have never exceeded 36 days. The correlation metric ranges from a negative 1, which means some markets are moving in opposite directions, to a positive 1, which reflects perfect, symmetrical movement. A disparity or lack of relationship between the two assets would be represented by 0.

Dollar Index DXY 20-day correlation against Bitcoin. Source: Trading View

The metric has been below minus 0.6 since August 19, indicating that DXY and Bitcoin have generally trended inversely. In fact, the longest inverse correlation period of all time ran from April 14 to May 20.

To say that Bitcoin holds an inverse correlation with the DXY index would be statistically inconsistent since it had negative 0.6 or less in less than 30% of days since 2021.

The dollar strengthened after the FOMC minutes

On Aug. 17, officials from the U.S. Federal Reserve indicated that further interest rate hikes would be needed until inflation fell significantly, according to minutes of the July 27 meeting.

Dollar Index DXY (orange, right) against Bitcoin (blue). Source: Trading View

The report caused the US dollar to appreciate against major global currencies as the market gave the Fed a vote of confidence. Meanwhile, Bitcoin fell 11% in two days to $20,800, bolstering the inverse correlation thesis.

Yet, a correlation does not imply causation, which means that it is impossible to conclude that the positive performance of the DXY had a negative impact on the price of Bitcoin after the publication of the minutes of the Reserve meeting. federal.

Correlation should not be used to predict short-term moves

Even though experts and influencers often use 20-day correlation data to explain daily price movements, a longer time frame should be analyzed to understand the potential impacts of the DXY index on Bitcoin price.

Dollar Index DXY (orange, right) vs. Bitcoin (blue), 2021. Source: TradingView

For example, 2021 exhibited a positive correlation between the DXY Dollar Index and Bitcoin. Perhaps some of the moves were anticipated either way, but no extended period of inverse correlation was present.

More importantly, events only relevant to cryptocurrency may have skewed the metric, such as the launch of the first US Bitcoin exchange-traded fund on October 19, 2021. Other examples include Tesla announcing a $1.5 billion investment. dollars to Bitcoin on February 8, 2021.

Additionally, analysts point to the Chinese crackdown on mining in May 2021 as the culprit for the market’s decline below $40,000. These events could not have been anticipated by the DXY Dollar Index, so any continued correlation may have had little impact during these periods.

Therefore, those who wait for a reversal on the DXY index before betting on a Bitcoin rally have no statistical support. Whenever positive (or negative) developments specific to the cryptocurrency industry take place, the historical correlation loses its relevance.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.