Over the years, Bitcoin has also been subjected to comparison with other assets. Be it major traditional stocks such as Dow Jones or S&P 500, or commodities such as Gold. Correlations between these assets have varied over time and often BTC has been able to ride on the greener side of things.
Yet, the market was in the middle of a tricky situation at the moment, where bearish sentiment is holding a strong position after months of being dominated by bulls. While there has been movement in the crypto space, one major ‘rival’ i.e the U.S dollar has acted in response as well.
Bitcoin vs U.S Dollar
In order to gauge market correlation in a more comprehensive manner, we have identified price action for Bitcoin and U.S dollar on a short-term and mid-term period. Another aspect essential in the analysis is the number of trading days. Bitcoin is traded 7 times a week while the U.S dollar can be traded only 5 times a week. Therefore the time period is a little different in terms of date-to-date.
As identified in the chart, from 23rd December 2020 to 21st June 2021, Bitcoin has risen by 40% during a 180-day period. Despite the strong correction period in the past month, that is a significantly healthy return. In comparison, from 12th October to 21st June 2021 (same 180-day trading period for USD), the dollar declined by -1.01%. The drop isn’t drastic because of the changes taking over in the short cycle.
Measuring each asset’s 30-day cycle, the trends are completely switched. Bitcoin has suffered a drop of 14.14% since 22nd May 2021, while the U.S dollar has risen by a significant 2.36% since May 10th.
So it can be inferred that the rising value of the fiat has negatively affected, and extended BTC’s value.
Is the correlation co-incidental or recurring?
While Bitcoin has various metrics that shared distinctive fundamental properties, a study between Bitcoin returns, trading volumes, volatility, and the U.S dollar suggested a significant relationship between their price movements.
The study utilized the Bitcoin Sentiment Index or BSI which incorporated various speculative values such as tweets, search volumes, google news and anything which creates hype or technically, a bubble. The ordinary least squares (OLS) regression model was used, which is a statistical method of analysis that estimates the relationship between one or more independent variables and a dependent variable.
When the empirical data was analyzed, the test results indicated that there was an inverse relationship between BSI, and Bitcoin’s volatility, which creates more noise or speculative trading in the market.
When speculation grows around the ‘bubble’ market, U.S dollar tends to improve, as credibility lies more on the regulatory currency side.
The study concluded that multiple data sets suggested that the U.S dollar is negatively impacted when BTC’s rises, and vice versa. Therefore, Bitcoin’s asymmetric factor becomes redundant, when speculative value depreciates in the market in the short term. Although it might sound harsh to term Bitcoin as speculative in 2021, considering only 2% of the global population utilize it, it is not technically false.
So should we expect a Dollar crash for BTC’s recovery?
Probably. Right now, the study discussed in this article is displaying a practical representation, where the U.S dollar is taking price advantage, with BTC’s declining value.
Hence, it might be important to keep an eye on the U.S dollar, in order to truly detect a market reversal for Bitcoin.