Why BTC react its price in the market in terms of Increase and Decrease value?

[gunhell16]

Hello everyone! Today we will talk about the inverse correlation of Bitcoin with the US dollar and why, usually, when the dollar increases, the price of Bitcoin most likely decreases. What are the factors in the movement of the price of Bitcoin and the US dollar? Most crypto traders do not know this; all they know is that on the part of Bitcoin, the price of BTC will increase because there is an upcoming halving next year. There is a narrative in the Bitcoin ETF: no one can stop the increase in the price of Btc, or only the traders who are only focused on the technical saw a good analysis, like the newbie traders who say that at 12k, the value of Btc will fall because there is a lot of liquidity here, said in their crystal ball, and they will say the phrase "Believe in me."

So, if you notice, they are all pertaining to Bitcoin. they forget the other side of the coins that also affects the movement of BTC, and that is the US dollar. There are trades in the Bitcoin-USD pair that they do not understand, which means that they are trading against the US dollar when they take a long position, and when they take a short position, it means that they are trading against the BTC, which means that they favor the US dollar in an opportunity like this.

In short, investors or traders prefer to exchange their Bitcoin for US dollars. That's when the demand for US dollars is higher than BTC. And this is where we will talk about the movement between the two. Which is where we will tackle the technical comparison and fundamental aspects of them that will surely help not only newbies but also traders and other communities here on the forum platform. You will surely learn a lot here on the topic we will talk about.

So let's start with the technical analysis. Let's compare the movement of Bitcoin with the US dollar index, or DXY. What is DXY? This is the measurement value of the US dollar relative to a foreign currency. This is where the US dollar's performance is measured compared to other world currencies. When it is higher than 100, it means that the US dollar is strong, it is possible that the interest rate is high, and there are many other factors that affect that. And when the index is below 100, it also means that the US dollar is weak. So here in the picture that we can see is a trading view, as seen below.



The one on the right is Bitcoin, and the one on the left is DXY. In the month of May 2021, you will see that this is the height of the Bitcoin rally, that he reached 60k, and everyone is bullish. And on the other side, the US dollar area is already at the bottom. And when the month of December 2021 comes, Bitcoin will have reached the ATH of 69k and fallen to the 50k price level. But most of the time this is just a pullback, even though it has formed a lower high already, almost completing the bearish pattern, and this time the bulls still have a price target of 100k, which is what most people think will happen. But most of the time, the bearish signal is ignored. Because the belief of the majority is that it will continue to rise.

But if we also look at those times in the month of December 2021, Dxy was rallying. It has a higher high and a higher low, a sign of strength in the US dollar and a sign of weakness in Bitcoin. We already have a sign that the bull market is over, the bear market is waving, and the rally for the US dollar is starting at this time.

And if we know them, we will be more careful and not just submit to the different beliefs of others. What is behind this rally by DXY? The answer is nothing but "inflation." Because in the month of December 2021, US inflation is at 7%. Although the Fed during these times did not raise the interest rate at that time, this was the anticipation payoff, so DXY rallied, which coincided with the decrease in BTC.
During Dxy's 2022 period, this is the continuous increase of Dxy's interest rate in America, which in turn is the continuous fall of Btc. And in November 2022, DXY shaved the market top, and in November 2022, BTC also shaved the market bottom, as you can see in the picture. Dxy gradually decreased from the top, and Btc also gradually rose from the bottom. But we have a break out here, like in the picture below.



The break out of Btc's structure is only going down, Let's just remember that during those times, Dxy was still above 100, which shows that the US dollar is still strong. And at that time, the Federal reserve had no plans to cut, so the reaction of the price of Btc and the US dollar was just like that. Because if the FED cuts the interest rate, it means they already defeat the inflation, then the US dollar will weaken again. Because investors will turn to risk assets including Bitcoin.

And if we look at the history of the Fed fund rate below;



During the 2016-2017 bull market, the only interest rate was below 2%, it was the time of Bitcoin halving and there were only a few constitutional investors during these times who participated and Michael Saylor was not there at this time. . And then 2018 bear market, the interest rate is still rising, only falling above 2%. Then the rate was cut, this is the time of the covid era where they have to print money. And since it's still a bull market, the interest rate is almost 0%, it results in a full blown bull market. And because of the amount of money printed, inflation increased, they had to control it, so in 2022, the interest rate will increase one after the other, reaching the level of the 2008 financial crisis of 6%.

So we are still hearing a lot that it could still end up in recession. But even so, there is not in all cases what is called inverse correlation. Because there are also many fundamental factors that affect Btc that have nothing to do with the US dollar. Just like the Technological changes, Regulatory news, related to Btc. And with the US dollar, we also need to know the things that affect it. Because Dxy does not move for no reason, and it is the reserve currency of the world and anything that happens has an effect on it. And of course the number one thing that affects the US dollar is the interest rate. Because if we don't know anything about it, it appears that we are tradig blindly.

So, that's all I hope everyone who reads this will learn something
God bless us all here. [1] what is DXY? https://www.axi.com/int/blog/education/indices/us-dollar-index
[2] What is inflation? https://www.investopedia.com/terms/i/inflation.asp

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[BitDane]

Hello everyone! Today we will talk about the inverse correlation of Bitcoin with the US dollar and why, usually, when the dollar increases, the price of Bitcoin most likely decreases. What are the factors in the movement of the price of Bitcoin and the US dollar? Most crypto traders do not know this; all they know is that on the part of Bitcoin, the price of BTC will increase because there is an upcoming halving next year. There is a narrative in the Bitcoin ETF: no one can stop the increase in the price of Btc, or only the traders who are only focused on the technical saw a good analysis, like the newbie traders who say that at 12k, the value of Btc will fall because there is a lot of liquidity here, said in their crystal ball, and they will say the phrase "Believe in me."

The reason why Bitcoin price react when dollar value increase or decrease is due to the purchasing power of dollar.  It is obvious that when the dollar value is higher , its purchasing power is also stronger thus with Bitcoin market having the demand and supply being even out, Bitcoin tends to be cheaper when buying during the dollar experience a stronger value.  And vice versa when Dollar is weaker.

Another factor is that when there is a good new regarding Bitcoin adoption the market sentiment becomes positive resulting in more demand coming in. No matter how strong the dollar value is, the price tends to increase because this time, the demand outweighs the supply and the increase in demand overcome the strength of dollar which has the opposite effect.

[Husires]

The connection between the price of Bitcoin and the interest rate curve is understandable due to the impact of interest rates on the ability of individuals, entities, and countries to access sufficient liquidity, and with there being no horizon for the price of Bitcoin to rise in the foreseeable future and the lack of risks in banking systems, many prefer to obtain interest instead of investing or buying Bitcoin, but the correlation Between Bitcoin and the price of the dollar, research: If the price of the dollar decreases, the price of Bitcoin will increase, which is illogical because the price of the dollar moves in a narrow range and within a maximum of 5% per day, while the forces of supply and demand control the price of Bitcoin, which may move the price by more than that.

[kingvirtus09]

Thank you op for providing such information about the movement of bitcoin in terms of its movement in the chart in the market, So through inverse collation this is the main reason why Bitcoin has an increase and decrease, apart from the news we read in articles and seen in the news.

It's a big deal anyway for us community on this platform to know the absolute movements in the Bitcoin market, but generally the movement of the dollar is always relevant by monitoring on dxy.

[MCUKing]

A good initiative OP to discuss this topic over here by, I would like to ask and answer some of the points here, I do agree with you that the Dollar and BTC Inversely move because in the crypto market, we use the USD/BTC pair most of the time, so Buying BTC is directly favoring the BTC and dumping USD and inversely it fits in as well due to open market.

BTC and USD proved the Inverse movement historically and a maximum of investors consider it as a significant factor in the Bitcoin market value momentum but at the same time this factor is not enough significant to surpass the market developments, sentiments, and fundamental changes, because here in the crypto market, there is no one who owes a favor to USD on the edge of BTC, what fundamentals USD own,  , if you ask me nothing s the trader's sentiments will always trigger hold his position most of the times in the favor of the BTC this the reason Bull rally always last on a much longer frame as compared to the Bear timeline. The factor OP you are discussing really acts dominating in the consolidation market momentum and specific timeframes. For the rest of the momentum in the market, a trader completely ignores it.  Because sentiments carry more load compared to the BTC/USD reversal movement analysis.

[pooya87]

This is something I've been analyzing for some time too and even though I disagree with you on some points, I'd say your theory is a pretty solid one.


As you can see the correlation here is not that strong. For example from November 2022 the DXY keeps dumping Jan 2023 while bitcoin either drops a little or shows no reaction to the big dump in DXY.
There are two reasons for the lack of strong correlation. One is that a lot of other factors affect bitcoin than just what US fiat does. Another is the interest rate which is not only rising in US but also rising a lot of other places.

I'd say basically it's all about the interest rate as the chart below shows a much better correlation compared to the one above.


You see when the FED (and others in other countries) raise the interest rate it becomes more attractive to invest in bonds (read: buy US debt and get a high interest on your investment). So whenever the US regime increases the interest rate, it acts like a vacuum sucking all the money from all the markets (look at gold chart and you'll see the same struggle there too) towards US bonds because it becomes the most attractive investment at that time. Ergo people dump their other assets like bitcoin and gold.

As we can see the second phase of bitcoin crash (from $45k+) starts as soon as FED increases the rates in March 2022 until the big first jump ends.
We can also see that the second big jump does not have nearly the same effect as the fist one which proves my first point above that there are a lot of other factors affecting bitcoin price.

Interest rate from 0.25 to 2.5
Bitcoin price from $45k to $20k -55%

Interest rate from 0.25 to 4.5
Bitcoin price from $20k to $15k -25%

Interest rate from 4.5 to 5.5
Bitcoin price from $15k to $25k +66%

[Faisal2202]

A good initiative OP to discuss this topic over here by, I would like to ask and answer some of the points here, I do agree with you that the Dollar and BTC Inversely move because in the crypto market, we use the USD/BTC pair most of the time, so Buying BTC is directly favoring ............................

You have pointed out a great correlation and your words are almost accurate. Because the relation between USD and BTC is the same as you described. And of course, the factors that effect the price of BTC and USD are not only dependent on the pair we or other person choose but also depend on many other factors which the OP has discussed in his post in full details.

Different economical events like the one OP has mentioned (COVID) plays important role in the movement of USD and in my personal experience I have observed that when the price of BTC decreases or increases the price of USD also decreases and increases. Let's say one the price of BTC decreases then the USD prices will be higher for a person who use USD as second currency. (that's a good benefit plus point for us).

For example, once I invested around 70$ dollars and I have to hold those tokens for longer period of time (the token was DYDX) and unfortunately I bought these token at high price of $19 dollars and on an average of $16 and I have to sell them at around $9 per coin. I was bearing a lot of loss. But fortunately, if I convert these loss booked money into my local currency then I made profit. I mean I was  little bit shocked too. But the inflation of US dollars was so high that US dollars was worth more at the time of selling DYDX and it was too low when I bought the DYDX token. I hope you understood my point here. Inflation is the main factor but despite that, BTC buying and selling also put some impact on the price of US.

[el kaka22]

These type of researches are important for the future of bitcoin and that is definitely something that we should care about, I believe that we are going to end up with something that would be important to move on, and should be better on the long term.

I guess that it should be something that we could care about if we really want to and it could result with a greater return if we are right as well so we should try to be right as many times as we possibly could, and try to do our research as well as we possibly could. However, if you are not certain about making it correctly each time, then I would highly suggest that you stay away from it as long as possible and not really make any type of improvement to try again.

[joniboini]

USD and in my personal experience I have observed that when the price of BTC decreases or increases the price of USD also decreases and increases. Let's say one the price of BTC decreases then the USD prices will be higher for a person who use USD as second currency. (that's a good benefit plus point for us).

What do you mean by a USD price increase? Are you referring to USDT or stablecoins in general or fiat exchange values? I never heard people saying that BTC is the cause of USD price movement, or how it affects USD-(other fiat) value. I think it is just a coincidence that your local currency rate changes when BTC prices move, especially when the market is so volatile.

Even if you believe there is an impact on the USD inflation rate, I doubt it is anything significant. The US unemployment rate, interest rate, etc. are more likely to affect it.

[GreatArkansas]

Will the DXY  guaranteed that will always pump if the interest rate also goes up? I'm curious about it.
From what I can see especially pooya87's post above, it just clearly showing it reverse correlate in interest rate but at the same time, we can also see DXY is pumping when interest rate pumps too.

[slaman29]

It all makes sense NOW, but I think people are still rethinking the exact correlation to dollar, just like they had to rethink correlation to stocks.

Previously, the thinking was inverse correlation to both but since Covid, BTC does the same path as stocks and then now, dollar good news always brings stronger reaction to BTC (like this week recover correlating with USD/EUR 0.94

[gunhell16]

Will the DXY  guaranteed that will always pump if the interest rate also goes up? I'm curious about it.
From what I can see especially pooya87's post above, it just clearly showing it reverse correlate in interest rate but at the same time, we can also see DXY is pumping when interest rate pumps too.

It does not imply that interest rates have gone up or that there will always be a pump in DXY; this is not a justification for a continuous pump. Then, as interest rates rise, this is what frequently leads investors to place their money in the US dollar. Why? due to the great returns they provide. This will lead to an increase in demand, which will drive the DXY higher.

The progressive collapse of the world economy, which frequently prompts investors to sell their US dollars or other assets like gold, is one reason the DXY was also impacted, among other things. Therefore, the DXY is currently declining.

The link between interest rates and Dxy is therefore generally speaking a complex one. Let's just keep in mind that while there is a significant historical correlation, Bitcoin is a volatile asset and Dxy is a volatile index.