The United States dollar index is currently testing the bottom of a 12-year trendline. But some traders are calling it the “most pivotal moment” for the global reserve currency since 2008, as they believe that continuous depreciation will likely boost the price of Bitcoin (BTC).
For over three months since April, the dollar has declined against other reserve currencies. Some investors believe that the fall in the value of the dollar has affected the price of Bitcoin. Prominent cryptocurrency trader Scott Melker said:
“This is arguably the most pivotal moment we have seen for the United States Dollar since it bottomed in 2008. This channel has been intact for over 10 years. If it breaks down, hide yo’ kids and buy a metric ton of Bitcoin.”
The U.S. dollar tests the lower end of a 12-year trendline. Source: Scott Melker
Why the U.S. dollar could have an impact on Bitcoin
In recent weeks, as BTC rose to as high as $12,000, investors pointed at the declining dollar. Jay Hao, CEO of OKEx, said a depreciating dollar raises the chances of a BTC rally.
The value of the dollar affects Bitcoin because traders typically price BTC against it. When the dollar depreciates, the asset that BTC is trading against is lower in value. Hence, when the dollar drops, it might increase the likelihood of BTC upside. Hao said:
“If the dollar continues to depreciate, there is a high probability that Bitcoin will continue to rise.”
Mark Wilcox, a Bitcoin analyst, raised a similar point. He pinpointed the biggest monthly drop of the dollar as the driving factor of BTC in the past several months.
Wilcox explained that rather than Bitcoin increasing in value, it is the dollar that actually declined in price. He said, “bitcoin didn’t go up, the dollar went down,” referring to the U.S. dollar index.
The U.S. dollar index since 2010. Source: FT, Bloomberg, Mark Wilcox
Analysts say the dollar has been declining relative to other reserve currencies due to the slowing U.S. economy. The U.S. has the highest number of coronavirus cases, which is causing the rate of economic growth to slow down.
“The thing that’s changed in the last few days is that it’s not just gold which has gone up against the dollar, but almost everything,” explained Société Générale’s global macro strategist Kit Juckes in a note. “That’s partly driven by a sense that the U.S. is having a harder time controlling the virus than others, which will see the U.S. economy underperform.”
Higher chances of a BTC uptrend
Traders are seemingly cautiously optimistic about the near-term trend of Bitcoin. At the same time, Bitcoin trading activity is reaching new highs in various markets, including institutional venues such as the CME and its BTC futures contracts.
In recent weeks, the open interest of the CME Bitcoin futures market has risen to an all-time high. It indicates higher activity from accredited and institutional investors. The rising appetite for BTC coincides with a falling dollar, which could further improve the sentiment around Bitcoin.
The CME Bitcoin futures open interest hits a new high. Source: Skew
One pseudonymous trader said:
“Even big American banks are beginning to have doubts about the US dollar’s status as world reserve currency. If Satoshi was still around, he would have a grin on his face. The landscape literally couldn’t be better for Bitcoin.”
The confluence of an unstable dollar and the rapidly increasing demand for gold could both fuel the momentum of BTC in the short term.
Wall Street veteran Max Keiser, for example, predicted last week that Bitcoin is destined to continue beyond its all-time highs this year, possibly hitting as high as $28,000 before seeing a market correction.