Could Bitcoin Benefit from a Weaker U.S. Dollar?

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Bitcoin may be primed to take off as analysts suggest that the dollar is about to lose its strength. A weaker dollar would be a positive sign for risk-assets like Bitcoin, offering a ray of hope in a reticent market. 

Leading Indicator Points to a Weaker U.S. Dollar

Data from the Wall Street Journal indicates that dollar reserves are usually a leading indicator for DXY, the index that tracks the price of the dollar relative to other fiat currencies. This data shows an inverse relationship between U.S. dollar reserves held and the strength of the DXY index. 

Three-month leading reserves for dollars are estimated to be at their highest level since 2015. Coupled with a new round of quantitative easing, there is reason to believe Bitcoin’s price performance will pick up in the coming months.

When the economy is in a tight spot, as it is now, investors tend to flock to cash as it provides a hedge against crashing asset prices. The dollar is the ultimate form of cash, so much so that other countries prefer to hoard dollars over their native currency. 

This creates a strong demand for U.S. dollars.

As investors fled to the dollar, DXY saw a near 9% gain as Coronavirus concerns caused distress to global markets and future economic outlook. However, from its peak on Mar. 20, the index is down 4.45% at the time of writing.

Quantitative easing increases the supply of dollars in the market. In reality, there is no way that companies and individuals combined can provide enough demand to soak up incoming dollar supply. 

Moreover, there is clear suppression in the strength of the dollar when the Federal Reserve commits to quantitative easing, as shown in the chart below.

When Moon, Sir?

When the dollar weakens, investors move back to risk assets. Stocks, corporate bonds, and even crypto had positive price performance during the Fed’s first three rounds of quantitative easing. 

During the second round, which lasted from November 2010 to mid-2011, Bitcoin appreciated just over 24,560%. From the start to the end of round three, Bitcoin made its then all-time high at $1,177 before winding down to $337. Still, it enjoyed a gain of 4,880% over this period.

Money that flows from the Fed may not directly come to Bitcoin, but it contributes to a weaker dollar and thus propels Bitcoin.

There are several positive catalysts for Bitcoin apart from a weaker U.S. dollar. The halving, which is set to take place in less than two months, will reduce the supply of coins in the market and put less selling stress on price.

To make up for this hit to miners, the difficulty of mining has been automatically reduced by the Bitcoin protocol. Together, all of these factors create the perfect storm for Bitcoin.

A weaker U.S. dollar aids the macro narrative for risk-assets like Bitcoin to do well in the next few months. 

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