Can Bitcoin repeat a 2017-like rally as dollar correlation reverses?

When the U.S. Dollar Strength Index (DXY) drops, it is commonly believed that the impact on Bitcoin (BTC) is positive, and vice versa. For example, the DXY index declined from 103.0 on Jan. 2017 to 92.6 in Aug. 2017, while Bitcoin (BTC) surged from $1,000 to $4,930 in the same period. This has led some analysts to suggest that a bull run similar to 2016–2017 is possible.

Investors who are interested in crypto currency, crypto market, web 3.0 meaning and coins are wondering if there is enough evidence to justify a bull run similar to 2016–2017. To answer this question, they should consider how to invest in web 3.0.

Is the Bitcoin-dollar inverse trend real?

Traders and crypto market influencers often alert the public about the negative correlation between Bitcoin and the DXY and how a reversal of DXY will likely drive the Bitcoin price higher.

Investment research @GameofTrades_ recently shared a chart showing the pattern in early 2023 and then repeating itself in May. This shows a clear inverse correlation.

Technical analyst el_crypto_prof also presented a bearish “Gaussian Channel” change on the DXY chart, which, according to the analysis, matched two previous crypto currency bull runs for Bitcoin and altcoins in 2016–17 and 2020–21.

BTC-DXY correlation varies with time

The inverse relationship between Bitcoin and DXY has never lasted longer than 7 weeks, as measured by the correlation indicator which runs from -100%, indicating that certain markets move in opposite ways, to 100%, indicating that the movement is in lockstep; 0 represents a total lack of correlation between the two assets.

Over the past 670 days, the metric has been negative 81% of the time, implying that DXY and Bitcoin have generally followed an inverse trend. However, readings between 0% and -50% denote a lack of correlation, and the longest-ever period of a correlation lower than -50% was the 47 days starting on Aug. 18, 2022.

Between June 2021 and November 2021, the DXY and BTC price presented a very similar pattern as both rose during that five-month period. Crypto currency-specific events, such as the launch of the first U.S. Bitcoin futures exchange-traded fund on October 19, 2021, might have distorted the metric, however, it is impossible to conclude that DXY’s positive performance affected Bitcoin price during the period.

Longer-term analysis still required for DXY

Analysts and market influencers often use 20-day correlation data to explain daily price fluctuations, but to understand any potential impacts of DXY on Bitcoin’s price, a longer time frame is necessary. For instance, when the U.S. Federal Reserve injects trillion-dollar stimulus packages into the economy, it may take weeks for the effects on inflation and global crypto currency flows to be seen. This is because not everyone will immediately put the money into circulation.

Due to the fact that coins are traded 24/7 on the crypto market, the price movements of Bitcoin are extremely sensitive to news, macroeconomic data, and geopolitical events, with long-lasting consequences. As an example, we can look at Bitcoin’s 38% loss in nine days on June 8, 2022.

It’s interesting to note that it took almost 4 months for the DXY index to move from 102.50 to the 114.2 peak by late Sept. 2022, even though Bitcoin had already bottomed at $18,900 much earlier.

Therefore, if you are considering how to invest in web 3.0, it is important to keep in mind that longer-term analysis is required to understand the effects of DXY on coins.

DXY a Poor Proxy for BTC Price

Betting on the DXY index to lead to a BTC price rally is not statistically viable, as the correlation between the two assets shifts over time.

Furthermore, even when the inverse correlation occurs, the immediate price action of Bitcoin may not reflect the longer term trends of the Dollar Strength Index.

Whenever significant changes in the crypto currency industry take place, the historical correlation becomes insignificant. This could have been the case for the recent Bitcoin gains, which cannot be directly linked to the supposed “Gaussian Channel” reversion on the DXY chart.

Ultimately, examining two or three cases of DXY index inverse correlation that happened during a prior crypto currency bull run is not enough to predict a similar bull run to that of 2016–17, considering the multiple instances of positive correlation and the gaps between both assets’ price action.

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