The Bitcoin cryptocurrency remains closely correlated with the markets. After corrections in the stock markets late last week and at the start of the new week, the cryptocurrency also gave way and fell back below the $40,000 mark. With the markets rallying in today’s trade, Bitcoin was also able to regain the round mark and with the last daily candle also confirmed the upward trend since the end of the correction at the start of the year.
However, the existing correlation with broader markets continues to expose Bitcoin and the rest of the crypto sector to the same risks as stock markets. The reversal in interest rates, inflation and geopolitical uncertainties caused by the war in Ukraine do not really leave room for a rise in prices, rather the markets are discussing the extent of a correction in the markets.
As a result, continued downward momentum for Bitcoin remains a scenario for investors to keep in mind. The US dollar, as the world’s indirect reserve currency, is another red flag. After two years of liquidity injections from the US Federal Reserve, this trajectory is reversing and this is reflected in the growing strength of the DXY, the dollar index, which compares the price of the currency to that of other major developed economies, including the British pound and the euro.
Immediately after the corona shock, the dollar depreciated considerably against the other currencies in the index, but since summer 2021 at the latest, the dollar has resumed an upward trend. The DXY has since returned to its pre-crisis level.
“DXY is approaching multi-decade highs,” analyst Dylan LeClair tweeted about it. “The USD continues to strengthen against foreign fiat currencies, tightening financial conditions. A breaking point for a historically overleveraged economic system is approaching as if tailor-made.” That should also mean downward pressure in the short term for Bitcoin, as has already been seen in the past, for example during the Corona crash in March 2020. According to the analyst, Bitcoin’s recovery will however occur when the Federal Reserve reaches a tipping point and does not will no longer be able to continue tightening its monetary policy.
“The Fed will eventually be forced back into easing, as any prolonged period of monetary tightening will be followed by a deep global recession,” the analyst predicted. “Supply chain damage caused by conflict in Ukraine and China shutdowns with this level of global debt = national bankruptcies. BTC will fly,” the analyst said via Twitter.
The current strong correlation between Bitcoin and the stock markets is due to the large amount of speculative capital that is in the crypto markets and is not invested in them for the long term and for fundamental reasons. Strong headwinds, such as sustained inflation momentum or the aforementioned case of an economic recession, ensure that this money will quickly run out and lead to selling pressure. However, if the strength of the dollar and the resulting negative effects for indebted countries and companies continue, the Fed will be forced to revise its tightening course so as not to completely stall the economy. However, inflation will continue to rage. This is an environment where Bitcoin’s fundamental strengths can shine and more and more investors will put their capital into Bitcoin for these reasons. Conclusion: strong potential for a short-term correction – as for the stock markets. Huge long-term upside potential. Investors can position themselves accordingly with cash reserves and gradually use lower prices to get started.
By Alexandre Mayer
Cover photo: 99Art/shutterstock.com