The price of Bitcoin has been dropping sharply for a couple of days – the reason may be related to the current strength of the US dollar (USD).
In reality there are several factors that are causing BTC to suffer, but the strength of USD is such that it could be the main reason.
USD very strong: Bitcoin price suffers
To measure the strength of the US dollar, the so-called Dollar Index (DXY) is used, which is the index that measures the strength relationship between the USD and a basket of other global currencies.
According to data from the DollarIndex.org website, the maximum daily peak for 2024 was reached just yesterday above 108.4 points, while this morning a very brief peak was reached above 108.5 points, which however immediately returned.
The fact is that 2024 began with a Dollar Index at 101.3 points, and that before November the annual maximum peak had stopped at 106.3 points.
With Trump’s victory in the US presidential elections on 5 November, the Dollar Index began to rise, first reaching new annual highs for 2024 in mid-November, and then in the second half of November rising even above 107 points.
At that point it was thought that its run was over, but instead starting last Wednesday it resumed.
The impact on the price of Bitcoin of the strength of the US dollar USD
Until Wednesday, the growth of the Dollar Index after Trump’s victory had not had negative consequences on the price of Bitcoin, which went from less than 70,000 USD to more than 100,000 USD.
Indeed, on Tuesday 17 December it recorded its all-time high above 108,000 USD.
Instead, the sudden surge in the Dollar Index the day before yesterday also immediately had a negative impact on the price of Bitcoin.
It should be remembered that, in the medium/long term, the trend of Bitcoin tends to be inversely correlated to that of the Dollar Index, so if DXY rises BTC tends to fall.
However, after Trump’s victory, while DXY rose from less than 104 points to more than 107 points, the price of Bitcoin rose from less than USD 70,000 to more than USD 100,000.
So from early November to mid-December there was a temporary suspension of the inverse correlation between DXY and BTC, due to favorable macro conditions for both USD and Bitcoin.
Wednesday’s problem
But what happened on Wednesday that changed the cards on the table?
What happened is that the Fed changed its mind about 2025.
Until Tuesday, markets believed that the Fed would cut interest rates at least four times in 2025. Instead, President Powell has made it clear that they have changed their minds, and are now more oriented towards just two cuts.
The fact is that the Fed’s monetary policy is still restrictive, and the markets were hoping that it could become much less so next year. However, after Wednesday they believe it could remain restrictive for a long time.
In fact, on Wednesday US stock markets recorded a sharp decline.
For example, in just one day the S&P500 index lost all the gains it had accumulated since mid-October thanks to the so-called “Trump trade”.
It’s as if a mini-bubble had burst, even if as far as the price of Bitcoin is concerned it simply returned to the levels of about ten days ago.
The near future
In any case, between today and tomorrow one cycle should close on the crypto markets, and another will begin.
At this moment it is still difficult to say what type of new cycle it will be.
However, such a strong Dollar Index suggests that it should fall in the new cycle.
For example, in 2016, after Trump’s first electoral victory, the Dollar Index went from 97 to 101 points in November, and then rose again to 103 points in December.
At the time, the maximum annual peak was reached on December 28th at 103.3 points, or just above the level already reached on the 15th of the same month.
This year the first post-election peak was reached on November 22nd, and the second was reached yesterday, although at a level slightly higher than that of Wednesday.
If history repeats itself, the Dollar Index may not rise significantly above 108 points again until the end of the month, and then perhaps begin to decline. It should be remembered that DXY often rises in a US presidential year, and then falls the following year.
The near future of the price of Bitcoin
To tell the truth, the rise of the Dollar Index in this month of December 2024 is proportionately higher than that of December 2016.
This could also be due to a slight advance in timing, and this could also lead to the possibility that the decline could begin before December 28th.
In 2016, in reality, the real downward trend, which then lasted practically 12 months, began on January 4 of the following year, so it is not at all impossible to imagine that this time too we will have to wait until January.
Furthermore, in those months the price of Bitcoin rose from $700 to $990, without reaching the previous historical high of $1,100 which was then only reached in January 2017. From February a very long bullrun then began which even brought it close to $20,000 in December.
In light of this, given that the picture seems similar in some ways, it is not absurd to think that the start of a new bullrun could be postponed to January.
