Dollar Index Loses Key Level: Bitcoin Cleared For Liftoff?
Bitcoin price is experiencing a pullback as this content is being typed. But after last night’s close on the DXY Dollar Currency Index, the top cryptocurrency could be cleared for takeoff.
The dollar has lost an important level that in the past has led to some of the biggest rallies in BTC history.
Correlations between cryptocurrency and fiat currency
Correlation is commonly found to some degree in almost all assets. It is rare that two assets are uncorrelated and instead tend to exhibit strong and weak, positive and negative correlations.
Technical analysts or investors look at asset correlations for diversification purposes and to reduce risk in a portfolio. For example, a portfolio with lots of cryptocurrencies would not benefit much from adding technology stocks due to strong correlation. It can even increase risk, as an entire portfolio goes down at once.
Few assets are as negatively correlated as Bitcoin versus the dollar. This is because the most dominant trading pairs feature BTC and USD. In the BTCUSD trading pair, BTC is the base currency and USD is the quote currency.
This is exactly why the DXY Dollar Currency Index losing a key level can have a dramatic impact on the price per BTC.
The dollar has lost the middle-Bollinger Band | DXY on TradingView.com
Why the Falling Dollar Means Bitcoin Crashed
The DXY Dollar Currency Index is a weighted basket of major currencies from around the world. None of them are Bitcoin. However, there is no better measure of dollar strength than the DXY.
In technical analysis, higher timeframes produce the most dominant signals. Not all deadlines are treated the same, so experimentation can provide early clues as to what’s to come. For example, the 4 week period only reduces 2 to 3 days every month interval. This time frame produces slightly earlier signals than monthly.
While the monthly DXY is resting in the middle of the Bollinger Band, within 4 weeks the level has already been lost. The last close of the candle ended below the 20-period SMA, which makes up the base of the upper and lower bands.
How does this have anything to do with Bitcoin, you ask? When USD was strong in 2022, it crushed BTC in the trading pair. If the dollar is about to plummet, the BTC side of the trading pair should rise again. In fact, each time DXY lost this level, BTCUSD had one of its biggest highs in the last decade.
O $DXY opened its 4W candle below the middle of the BB.
After a close, it usually moves to the lower Bollinger band.
Each time this has happened, it has resulted in the biggest and most bullish moves in #Bitcoin in the last decade.
But yeah, no new ATHs this year because of the halving 🙄 pic.twitter.com/i7X0FsfjYN
— Tony “The Bull” (@tonythebullBTC) April 24, 2023