Why Did Bitcoin Skyrocket When the US Dollar Declined?

The U.S. dollar drop and the Bitcoin surge happened at the same time. Why? Before we reveal the answer, let’s explore the multiple factors in the background starting with the continued downward adjustment of interest rates on U.S. Treasury bonds and quantitative easing policies. These policies have caused a lot of U.S. dollars to be sold, leading to a further decline in the dollar index. The latest data shows that the U.S. dollar index has fallen below 93. This not only marks its lowest point this year but a slide past its two-year low.

Source：TradingView

In the U.S. dollar derivatives market, short positions have also reached a new high since April 2018. Global Hedge funds are betting on a further decline of the U.S. dollar: The aggregate bearish bet on USD rose by nearly $5.3bn this week to reach $24.5bn.

From the perspective of correlation, the correlation between Bitcoin and U.S. dollar, and gold and U.S. dollar declined, while the correlation between Bitcoin and gold increased. The price reaction to this is that both gold and Bitcoin have seen skyrocketing against the backdrop of a falling U.S. dollar index.

Source：Coinmetrics 

The rise in gold can be explained by the fall in the U.S. dollar which has increased global demand for safe-haven assets such as precious metals. Although Bitcoin may not have achieved safe-haven asset status just yet, it is another global alternative investment target besides gold. Moreover, when gold rises to people’s psychological highs, many of the U.S. dollars that are still being continuously sold start to flow to Bitcoin and other digital currency markets.

For example, data from Coinmetrics shows that the supply of USDT continues to rise, especially in July, when the upward curve became steeper. At the same time, the upward momentum of gold has slowed down a bit, indicating that more U.S. dollars have begun to flow into the digital currency market for minting than before.

Source：Coinmetrics

After these U.S. dollars were minted to USDT, part of them inflowed to the exchanges. The inflow of USDT into exchanges increased by 282,539,130 USDT to 725,857.429 USDT on July 27 – the largest single-day rise in 143 days.

USDT inflows to exchanges

Source：Chainalysis 

This is a  large amount of USDT flowing into  exchanges, yet data from Glassnode shows that exchanges’ USDT balance has been declining since April. At the same time, the Bitcoin balance of exchanges has continued to rise. Based on this, we can speculate that most of the USDT flowing into exchanges was used to buy Bitcoin.

Looking at all the data, it seems pretty clear that Bitcoin’s rise this time around has been greatly affected by the U.S. dollar. It can be summarized as follows:

The U.S. dollar index has fallen → the demand for hedging has increased → the price of gold has risen → the price of gold has reached a psychological high → investors start seeking other alternative investment products → the rate of USD minting as USDT has increased → more USDT flowing into exchanges → selling USDT and buying Bitcoin →  exchanges’ Bitcoin balance rises and Bitcoin’s price rises.

Source：Skew

If the dollar continues to depreciate, there is a high probability that Bitcoin will continue to rise. So if you want to long Bitcoin, the average funding rate of OKEx swaps is lower than all major competitors, as can be seen from the data above. This helps you to maximize your profits while trading on a robust and secure platform with a comprehensive risk management system.

About the Author: Jay Hao is the CEO and Chief Customer Service Officer at OKEx.

This article first appeared on LinkedIn