U.S. dollar index and Bitcoin

The DXY, which measures the value of the U.S. dollar against a basket of other fiat currencies, has maintained its strength since 2021 and is currently trading at 95.57.

Many investors are focusing on inflation in the United States, such as consumer prices and asset prices, but they are also paying attention to the dollar’s increasing strength against other foreign currencies.

Because the dollar serves as the world’s reserve currency, a huge amount of dollar-denominated debt exists overseas outside the Federal Reserve’s jurisdiction. As a result, when the dollar appreciates against other currencies (even if the dollar itself depreciates in terms of goods, services, or financial assets), debtors are forced to sell dollar-denominated assets to cover their liabilities, creating a dollar “short squeeze” that could lead to a collapse in financial markets.

These events were triggered by the economic lockdown from COVID-19, but the rally in the DXY in March 2020 occurred in tandem with a global financial market crash.

For global financial assets, including Bitcoin, the dollar is the denominator of the trading pair; as the denominator’s value rises, asset values naturally fall, which goes without saying.

In particular, in 2020 the DXY and Bitcoin were in a very tight inverse correlation, and a dollar weakness benefited all dollar-denominated financial assets. However, since then, they diverged, and for most of 2021 Bitcoin’s price moved with the DXY rising.

This can be read as Bitcoin returning to around $20,000 due to a stronger dollar. Nonetheless, the fact that the dollar is strengthening against other currencies is noteworthy and all asset class investors should recognize and monitor it.

Because if this trend persists, it could trigger leverage across asset classes, creating a superb buying opportunity for those looking to acquire Bitcoin cheaply.

The DXY may rise in tandem with higher consumer prices, and if the DXY continues to rise toward the levels seen in early 2020, it could pose headwinds for other dollar-denominated asset classes, including Bitcoin, so it deserves renewed attention.

Next, with Bitcoin price below $60,000, let’s reassess the relationship between exchange reserves and Bitcoin exchange balances. On a macro level, Bitcoin supply on exchanges continues to decrease, and the share of circulating supply held on exchanges fell to a three-year low as of yesterday.

During the previous peak summer when prices hit all-time highs, a large amount of Bitcoin flowed into exchanges, causing supply on exchanges to rise. However, the supply on exchange wallets has declined by more than 9% (250,000 BTC) since the June peak this year, and this trend appears to be continuing.

If this marks a macrocycle top, we can expect more Bitcoin to flow into exchanges for selling.

Another way to view exchange balance is to look at the daily net flow, the amount entering or leaving exchanges. Exchange wallets and addresses are classified using Glassnode’s proprietary data science, statistics, and clustering techniques. In general, exchange classifications are difficult, and they can change whenever exchange practices evolve, so caution is required when interpreting this data.

For example, if there is an alert on a given day showing a withdrawal of 10,000 BTC from an exchange, the best way to confirm it is not an internal, unclassified exchange wallet transfer is to wait a few days.

The figure below shows data focused on a 14-day moving average to observe a larger trend while accounting for daily volume changes. Compared with past all-time highs and previous peaks, inflows today are not seen as much. If this is a macro top, currency inflows are expected to increase to indicate more selling.

While exchange balances reach new lows, balances held off-exchange are rising. A few months after the long-term market shift in March 2020, a persistent correlation between off-exchange balances and Bitcoin price has been observed.

This is an unusual period even when compared to the last five years. In Bitcoin’s history, it has never exited exchanges at this pace.

If Bitcoin disappears from the market, the available supply to purchase would decrease, and as new demand enters, upward price pressure would emerge.

From these data, we hope you will gain the ability to read the essentials, and we would be grateful if you would take the “Cryptocurrency Skills Certification Course” to update your knowledge and practice.

We look forward to your participation.