Can Bitcoin repeat a 2017-like rally as dollar correlation reverses?

There is a common belief that when the U.S. dollar declines relative to other main global currencies, as measured by the U.S. Dollar Index (DXY), the impact on Bitcoin is positive, and vice versa.

For instance, the DXY dropped from 103.0 in January 2017 to a 92.6 low in August 2017, while Bitcoin (BTC) rallied from $1,000 to $4,930 in the same period. But is there enough evidence to justify a bull run similar to 2016–17, as some analysts are arguing?

Is the Bitcoin-dollar inverse trend real?

Traders and influencers frequently warn about this negative correlation and how a reversal of the DXY will likely push the Bitcoin price higher.

Investment researcher Game of Trades recently posted a chart presenting the pattern in early 2023 and then again in May. There’s some indisputable evidence of the inverse correlation there.

Bitcoin and DXY have maintained a negative correlation year-to-date in 2023 pic.twitter.com/VTePX3PNs6

— Game of Trades (@GameofTrades_) June 22, 2023

Moreover, technical analyst Moustache presents a bearish “Gaussian Channel” change on the DXY chart, which, according to the analysis, matched two previous bull runs for Bitcoin and altcoins in 2016–17 and 2020–21.

#Bitcoin

The DXY (US Dollar Index) has changed the color from green to red on the Gaussian Channel.

The last two times this happened, $BTC and Altcoins experienced a bullrun (parabola) in the following months (2016-2017 and 2020-2021).

Sounds exciting, doesn’t it? pic.twitter.com/kHJeM6iZDH

— ⓗ (@el_crypto_prof) June 26, 2023

BTC-DXY correlation varies with time

The seemingly inverse relationship between Bitcoin and the DXY has never lasted more than seven weeks. The correlation indicator runs from negative 100%, indicating that certain markets move in opposite ways, to positive 100%, indicating that the movement is in lockstep; 0 represents a total lack of correlation between the two assets.

The metric has been negative for 81% of the past 670 days, indicating that DXY and Bitcoin have generally followed an inverse trend. Still, that’s not how the correlation metric works, because readings between 0% and negative 50% denote a lack of correlation.

In fact, the longest-ever period of a correlation lower than negative 50% was the 47 days starting on Aug. 18, 2022. Therefore, saying that Bitcoin has an inverse correlation to the DXY would be statistically incoherent since it was negative 50% or lower for less than a third of the days since September 2021.

Between June 2021 and November 2021, the DXY and the BTC price presented a very similar pattern, as both rallied during that five-month period.

Events solely relevant to the cryptocurrency might have distorted the metric, however, such as the first Bitcoin futures exchange-traded fund in the United States, launched on Oct. 19, 2021.

But regardless of the rationale behind the move, correlation is not causation, meaning it is impossible to conclude that DXY’s positive performance affected Bitcoin’s price during the period.

Related: Will BlackRock’s ETF slingshot Bitcoin’s price skyward?

Longer-term analysis still required for DXY

Even though analysts and market influencers frequently use 20-day correlation data to explain daily price fluctuations, a longer time frame is required to comprehend potential, if any, effects of DXY on Bitcoin’s price. 

For instance, when the U.S. Federal Reserve injects trillion-dollar stimulus packages into the economy, odds are the impact on inflation and global currency flows will take a couple of weeks. After all, not every family, business and financial institution will put the money into circulation right away.

But the price signals on the Bitcoin market are more immediate, as coins are traded 24/7. So the price movements are extremely susceptible to news, macroeconomic data and geopolitical events, with reverberating effects for weeks and even months.

A perfect example can be demonstrated by Bitcoin’s 38% loss in nine days on June 8, 2022.

Notice how it took almost four months for the DXY to move from 102.50 to the 114.2 peak in late September 2022, even though Bitcoin had already bottomed at $18,900 long before that.

DXY a poor proxy for BTC price

In other words, those betting on a DXY reversal preceding a BTC price rally have no statistical support, given that the correlation varies over time.

Moreover, even when the inverse correlation happens, there may be a gap between Bitcoin’s immediate price action and the longer-term trends of the U.S. Dollar Index.

Whenever favorable (or unfavorable) developments in the cryptocurrency industry occur, the historical correlation becomes irrelevant. That might have been the case for the recent Bitcoin gains, which can’t be directly attributed to the supposed “Gaussian Channel” reversion on the DXY chart.

Ultimately, cherry-picking two or three instances of the DXY inverse correlation happening while a cryptocurrency bull run occurred in the past is not enough to call a bull run similar to 2016–17, considering the multiple instances of positive correlation and gaps between both assets’ price action.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.