The leading cryptocurrency is usually the one that sets the pace in the market as a whole and numerous analysts predict a very bullish for the coming months. However, this roadmap could be hindered as well as favored by a very specific factor: its correlation with the US Dollar Index (DXY).
Dollar vs Bitcoin: the relationship that worries the market
Rania Gule, market analyst at XS.com, points out that the recent declines in the digital assets They came “as investors anticipated the Federal Reserve’s (Fed) decision to temporarily halt interest rate hikes in September.” So he ‘green ticket’ frame 10 month maximums in the expectation that the Fed tighten its monetary policy.
This expert highlights that the growing correlation between BTC and DXY last December “supported its rise throughout 2023.” “The price of bitcoin rose approximately 95% to reach its highest levels in April, exceeding $30,000,” he recalls. However, there are two factors that can make cryptos have to row against the current.
The two factors that pressure Bitcoin
On the one hand, the bear market generated after the collapse of Tierra in the spring of 2022 and which cryptocurrencies continue to try to cope with: on the other, that a good part of this rise, Gule explains, has been supported by the liquidity injection carried out by the Fed in 2020 as part of its efforts to avoid a recession.
“As the flow of liquidity has dried up, a gap has emerged between financial markets, stocks and cryptocurrencies. With the shortage of liquidity, the market is vulnerable to a collapse, especially since many indicators point to a recession. As global interest rates approach the end of the largest central bank interest rate hike cycle in history, this situation is getting worse. When the market depends on a greater source of liquidity, it is quickly heading towards a recessionand based on the mechanism by which liquidity pumps fuel market increases, liquidity drain provoke violence market crashes“explains Gule.
The XS.com strategist believes there are “clear signs” of recession in “several parts of Europe” and deterioration of growth in China and,”eventually”, in the United States, which would cause “normally, the World economy “With an injection of liquidity followed by stable long-term interest rates, and with the Fed expected to focus on policy easing in 2024, the price of BTC is likely to and other cryptocurrencies will decrease,” he says.
Likewise, the liquidity of the cryptocurrency market has dried up “when it was needed most,” in the words of Saxo Bank expert Mads Eberhardt. Specifically, last May saw the lowest combined trading volume of these two exchanges: about US$39,000 million. Two years earlier, this figure rose to $369 billion.
“Worse liquidity means there are fewer participants in the market and less volume is needed to move the needle in terms of price, especially if larger sizes are negotiated“he adds. This, he explains, gives rise to a negative scenario for cryptocurrencies and, in addition, highlights that it is likely that there will be a greater drop in liquidity due to the market conditions They are worse than last year due to the demise of Silvergate and Signature Bank.
Source: Ambito
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