Delayed Dollar Bust May Cripple Bitcoin Rally Due to Correlation

Dollar Bitcoin correlation
Dollar Bitcoin correlation

NAIROBI ( — Bitcoin’s bullish momentum in 2024 could face headwinds as a surprisingly strong US dollar may delay the anticipated “dollar bust” typically associated with cryptocurrency surges. Historically, Bitcoin rallies have occurred during periods of dollar weakness, with the negative correlation playing a key role in determining the cryptocurrency’s market bias.

Dollar Bitcoin Correlation to Hurt Crypto

Wall Street is bracing for a potentially market-shaking event this week: the release of the core PCE data on Friday. This inflation indicator is the Federal Reserve’s preferred metric and could significantly impact investor sentiment and market volatility.

Core PCE index
Core PCE index vs. Fed’s inflation target

While a slight decline in core PCE is expected, an upside surprise echoing the recent CPI and PPI trends could have dire consequences for Bitcoin’s trajectory.

A stronger-than-expected inflation reading could signal that price pressures remain persistent, leading the Federal Reserve to extend its interest rate hiking campaign further into 2024. This shift in monetary policy could drive the dollar higher, potentially undercutting the Bitcoin rally.

Why Dollar Bust Strength Matters for Bitcoin

Bitcoin has a well-documented history of inverse correlation with the US dollar. This means that periods of dollar weakness have often coincided with Bitcoin rallies. For instance, the DXY (Dollar Index) dropped 2% below 90 in February 2021, when Bitcoin soared above a landmark $50,000.

US dollar index
US dollar index. Source: TradingView

The dollar’s performance is crucial for Bitcoin because the two assets have historically moved in opposite directions.

A strong dollar could create headwinds for Bitcoin bulls hoping for a rally. It’s worth noting that January did bring a minor positive for Bitcoin enthusiasts: strong inflows into spot Bitcoin ETFs from major players like BlackRock and Fidelity, totaling around $4.8 billion. This inflow could potentially cushion a steeper downside in the near term.

While the robust dollar casts a shadow on Bitcoin’s near-term prospects, there’s still a glimmer of hope. The strong inflows into spot Bitcoin exchange-traded funds (ETFs) operated by BlackRock and Fidelity are a positive sign. These investments reached nearly $4.8 billion in January and could help cushion any potential downside for the cryptocurrency.

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