There are various reasons for the decline in the price of Bitcoin, but the main one is the strengthening US dollar. It can be measured and monitored with the dollar index (DXY) and in relation to the potential for a recession to emerge from aggressive rate hikes. Read the full explanation.
Since November 10, 2021 until today, Sunday (19/6/2022), the price of Bitcoin has fallen more than 74 percent on a daily basis. Bitcoin price today crashed to US $ 17,598 in the early hours of the morning, well below the US $ 20 thousand which was a record high in December 2017.
On a weekly scale, the price of the number one cryptocurrency has fallen below the line Moving Average (MA) 200, the same as on March 9, 2020, December 3, 2018 and August 24, 2015. Technically, the current price has actually oversoldwhich historically could move up, if it breaks above the 50 MA.
However, this scenario can be refuted if one looks at the context and other variables, namely the current macroeconomic situation, namely the significant strengthening of the US dollar. What’s the cause? Yes, of course because the Fed aka the US Central Bank will continue to do it tapering (removing assets from its balance sheet) and will continue to raise its benchmark interest rate throughout this year and in 2023 to fight bad inflation of more than 8.6 percent.
It’s a matter of tapering it had been discussed in November 2021, contributing to the decline in the price of Bitcoin and other cryptocurrencies at that time. And it was even more assertive in March 2022 and today when the Fed will continue to raise interest rates so that inflation can be reduced to 2 percent.
In general terms, investors and traders will be more interested in entering the stock and crypto markets when interest rates are low, as Goldman Sachs pointed out last year. And this is what happened before, but not today.
Well, let’s focus on the relationship between the ups and downs of the dollar’s value and the price of Bitcoin. An analyst at crypto research firm Delphi Digital said that the price of Bitcoin will tend to go against the dollar index. That is, if the United States dollar weakens, then Bitcoin has a good performance and vice versa. In other words, the cause of the Bitcoin price dropping is because the dollar is strengthening.
What is the Dollar Index (DXY)?
The dollar index symbolized by DXY is a measuring tool to monitor the strength and weakness of the US dollar against the currencies of other countries that are the main trading partners of the United States, namely the European Union euro, Swiss franc, Japanese yen, Canadian dollar, British pound and Swedish krona. DXY was designed in 1973 by the Fed 2 years after the US dollar was no longer pegged to gold reserves and now DXY is managed by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE).
Well, because the US dollar is currently still the world’s main currency for trading, monitoring DXY is necessary to measure its value relative to the stock market and crypto market or other types of assets.
Causes Bitcoin Price Drops Significantly
Several months ago, the team of analysts from NYDIG said that the strengthening dollar made investors switch. From what they previously held Bitcoin or gold, because the currency strengthened, they turned to the US dollar.
To see the strength of the dollar we can look at the DXY chart we can use data from this TradingView.com site. When this article was written DXY was at level 104, down 0.4 percent since June 17, 2022. However level 17 June 2022 is the highest since 18 June 2021, because it is already above the 200 Moving Average (MA).
Technically it’s a good sign, that the US dollar is entering a period of time bullish. At the same time, Bitcoin price weakened, entering the range of US$36,582 after hitting a local high, US$65,044 on April 14, 2021.
Indeed, the correlation is not always positive, but more often, because traders “playing” the market in order to profit from the ups and downs of the dollar against BTC.
So, it’s not surprising, when in November 2021, the Fed announced it would raise interest rates and do taperingthe market reacted by accumulating dollars and selling their stocks and crypto assets.
Well, on December 31, 2021 it became even more real, when the price of BTC was below the 200 Moving Average on a daily scale (US47,400). This is a very strong marker, that era bearish has arrived. The drop was more than 30 percent from a high of US$69,000 per BTC. In the context of the stock market, when a stock index has fallen 20 percent from a record high, it is categorized as bearishas is currently the case.
Bitcoin Price Recovery In The Event of Recession
To answer this, we need a number of other indicators, apart from the strength of the dollar, namely macroeconomic policies, including aggressive policy rate hikes and policy tapering by the Fed and a number of other central banks throughout this year and into next year.
Keep in mind that a policy like this hasn’t happened since Bitcoin was launched in 2008. At that time, until November 2021 the dollar was generally weak, due to the policy of low interest rates and the abundance of the dollar, the impact of quantitative easing. That is also the background of Satoshi Nakamoto designing BTC.
Recession factors of which need to be considered. Remember in March 2021, when the pandemic was officially announced by the Fed, Bitcoin price had dropped and recovered quickly. It was a sign of a recession, as it forced the central bank to pour in dollars and cut interest rates.
The scenario for Bitcoin price strengthening is due to the recession, which is projected to occur next year, only if the policy of increasing interest rates this time will hamper US economic growth for two consecutive quarters.
The figure below shows the relationship between the rise and fall of the benchmark interest rate with the emergence of a recession. Recessions often occur, after the benchmark interest rate is raised aggressively. A short recession peaked in March 2020, which began in late January 2020, after interest rates peaked at 2.44 percent on April 15, 2019.
Another previous recession (Bitcoin has not yet arrived at the start), occurred in December 2007, after interest rates rose to a peak of around 5.24 percent. The recession peaked in June 2009, a few months after BTC was launched.
If a recession occurs in the future, then the Fed will inevitably pour US dollars again to save the economy. Interest rates were forced to be lowered and the potential for heavy inflows of capital into the stock and crypto markets again.
When that will be, no one knows, but the graph above gives us the yardstick: interest rates are rising high and leading to a recession.
Interest rates are projected to reach 3.4 percent this year, according to a number of experts CNBC. That’s much larger than April 2019 and nearly the same as August 2005, before the 2007 recession.[ps]