Bitcoin price is falling as this content is being written. But after closing overnight in the DXY Dollar Currency Index, the top cryptocurrency could be liquidated to boot.
The dollar lost a key level that in the past has led to some of the biggest rally in Bitcoin history.
Correlations between cryptocurrencies and fiat currencies
Correlation is found fairly commonly across almost all assets. It is rare for two assets to show no correlation, instead they tend to show strong and weak, positive and negative correlations.
Technical analysts or investors look at asset correlations for the purposes of diversification and reducing risk in a portfolio. For example, a heavy cryptocurrency portfolio wouldn’t benefit much from adding technology stocks due to the strong correlation. It can increase risk even as the entire portfolio declines simultaneously.
There are few assets that are as negatively correlated as bitcoin against the dollar. This is because the most dominant trading pairs feature both Bitcoin and the US dollar. In the BTCUSD trading pair, BTC is the base currency and The dollar is the quote currency.
This is exactly why DXY losing a key level can have a significant impact on the price of BTC.
The dollar has lost the middle-Bollinger Band | DXY on TradingView.com
Why the fall of the dollar means the rise of bitcoin
The DXY Dollar Currency Index is a weighted basket of major currencies from around the world. None of it is Bitcoin. However, there is no better measure of dollar strength than DXY.
in Technical AnalysisHigher timeframes produce the most widespread signals. Not all timeframes are treated equal, so experiments can provide early clues about what will happen. For example, the 4-week time frame is only truncated by 2-3 days for each 1-month interval. This timeframe gives signals a little earlier than monthly.
While the Monthly DXY is holding at the middle of the Bollinger Bands, the level has already lost ground on the 4-week time frame. The last close of the candlestick closed below the 20-period simple moving average, which forms the basis of the upper and lower bands.
What does this have to do with bitcoin, you ask? When the US dollar was strong in 2022, bitcoin crushed the trading pair. If the dollar is set to decline, then the bitcoin side of the trading pair should rise again. In fact, every time DXY lost that level, BTCUSD had one of its biggest highs in the past decade.
the DXY dollars A 4W candle opened just below the middle of the BB.
After closing, it usually moves to the lower Bollinger Band.
Each time this happened, it resulted in the largest upward movements in the market # Bitcoin over the past decade.
But yeah, no new ATHs this year because the halving pic.twitter.com/i7X0FsfjYN
– Tony “The Bull” (tonythebullBTC) April 24, 2023