Does the Dollar Hold the Key to Bitcoin’s Next Move Up?

The pain continues for crypto investors in a year characterised by lower lows and ever-diminishing sentiment. Crypto’s total market cap topped back in November of 2021 at just over $3 trillion, and it’s now sitting at around $900 billion, which equals an over-70% haircut for those investors who held on to their positions throughout this unrelenting bear market.

Turning to bitcoin, the largest component of that total market cap, we see that it has given back the entire bull market’s gains and is currently trading at levels last seen in December 2020. Many of you will recall that bitcoin was tentatively emerging from 2018’s bear market before the pandemic. As it rallied its way out of the broad crash, we saw in March that the $20k level became an important gauge of the rally’s strength as it was the previous cycle’s peak. Two years later and following an all-time high just short of $70k, bitcoin finds itself testing that level from above while failing to breach the 20-day moving average on each subsequent bounce.

Obviously, a large number of factors weigh on the price, including the Federal Reserve’s hawkish pivot at the beginning of the year, which has led to a tightening of financial conditions. Add to this recession fears, inflation, and war. Unfortunately, these are the same factors influencing the downward path of the US tech sector, to which crypto remains uncomfortably correlated.

However, as you can see above, the US dollar seems to be in control here. A strong dollar (particularly one with a rising interest rate) adversely affects crypto prices, similarly to how it affects the price of other hard assets like gold. With the DXY testing the 1.09 level at the time of writing and EUR/USD at parity for the first time since 2002, there’s clearly a lot more going on here than an orderly bull/bear cycle for crypto investors to be concerned about.

The DXY, rather than crypto, is actually the only one of the two really providing any technical exhaustion signals here, with RSI divergences visible on daily, weekly, and monthly timeframes. The dollar could hold the key to crypto’s next rally as it eventually consolidates from being so overbought. Unlike other assets, crypto has now fully retraced to the last cycle’s starting point, so it’s possible we could see powerful rallies (if not a change in the prevailing trend) if and when the dollar finally cools off.

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