Dollar index plummets to 21-year lows, fueling Bitcoin's potential surge towards record-breaking highs
In recent days, the trading activity of Bitcoin has cooled off significantly, with a decrease of 18% in volume to approximately $21.5 billion. This drop comes as the U.S. Dollar Index (DXY) has reached historically weak levels, currently sitting 6.5 points under its 200-day moving average.
Historically, the relationship between the U.S. Dollar and Bitcoin has been an often inverse correlation, with Bitcoin tending to appreciate in value when the U.S. Dollar weakens. This pattern is particularly noted against the DXY, a measure of the dollar's strength versus major currencies.
However, the current market conditions are more complex than before. Despite the DXY recently hitting historic lows due to rising U.S. debt and inflationary pressures, Bitcoin's price has not consistently responded with the expected increases. This divergence suggests that other market factors, such as inflation concerns and shifting capital flows, are complicating Bitcoin’s performance relative to the dollar.
Bitcoin’s price is also influenced by U.S. monetary policy, notably the M2 money supply growth. During periods of aggressive money supply expansion, such as the 2020–2021 pandemic response with Fed rate cuts and liquidity injections, Bitcoin experienced explosive price increases as investors sought protection against currency devaluation. When monetary policy steadied in 2023–2024, Bitcoin entered a consolidation phase.
As M2 money supply growth begins to accelerate again and expectations of Fed rate cuts rise, Bitcoin is showing renewed strength and is even outperforming traditional inflation hedges like gold, suggesting a potential return to its historic role as a liquidity-driven hedge against dollar weakness.
Bitcoin's correlation to the DXY typically ranges from -0.4 to -0.8. Currently, Bitcoin trades at $108,712, with a small increase of 0.2% in the past 24 hours. The cryptocurrency is deep into its bull run and is currently trading above all major moving averages, denoting an overall upward trend.
Derivatives trading volume has decreased by approximately 12% to $55.3 billion, while the relative strength index is neutral at 56, indicating neither significant overbought nor oversold conditions. The Bollinger Bands have slightly widened, suggesting an increase in price volatility may occur soon.
Interestingly, the momentum indicator has entered negative territory, suggesting short-term hesitation. This is the largest gap seen in more than 21 years. In 2022, when the DXY surged to a 20-year high, Bitcoin fell to roughly $16,000 but bounced back above $40,000 when the dollar fell in late 2023.
Derivatives market open interest has decreased to $73.41 billion. Bitcoin has frequently increased in value when traders move their money to assets that might hold value better during currency stress. However, Bitcoin's price hasn't broken out just yet, as it's only about 2.7% below its all-time high of $111,814 set on May 22.
The long-term $120k trendline test could define Q3. Bitcoin is facing resistance at $110,300 and support at $107,100. Bitcoin’s role has evolved with growing institutional adoption since 2021, which has introduced additional dynamics affecting its price beyond just dollar movements, including regulatory developments and broader crypto market trends.
In summary, Bitcoin has historically served as a hedge in a declining dollar environment, often appreciating as the dollar weakens. However, recent market complexities mean this relationship is less straightforward, with Bitcoin’s performance now influenced by broader macroeconomic and liquidity factors beyond simple dollar depreciation. Still, renewed monetary easing and money supply growth in 2025 may herald a strengthening Bitcoin amid dollar weakness.
- In recent times, Bitcoin's correlation with the U.S. Dollar Index (DXY) has typically ranged from -0.4 to -0.8, indicating an inverse relationship.
- Despite the DXY reaching historically weak levels, Bitcoin's price hasn't consistently increased as expected, suggesting that other market factors are influencing its performance.
- The derivatives market open interest has decreased, while Bitcoin's price is still about 2.7% below its all-time high, indicating that traders may still be moving their money into other assets during currency stress.
- The role of Bitcoin has evolved, with growing institutional adoption since 2021, introducing additional dynamics affecting its price beyond just dollar movements, including regulatory developments and broader crypto market trends.
