It’s been a long, dark crypto winter for Bitcoin (BTC 4.57%), with the price of the largest cryptocurrency in the world having now fallen almost 60% this year. High inflation, which has led to aggressive interest rate hikes by the Federal Reserve, has largely led cryptocurrencies to act much like tech stocks, which are not faring well against rising interest rates.
With more rate hikes expected, many are now wondering when the crypto winter will end. Although it is difficult to predict the short-term future, there is an event that could allow Bitcoin to escape these difficult times.
An extremely strong US dollar
Besides rising interest rates, one event that has seemingly impacted the crypto market is the surge in the US dollar, which hit a 20-year high. The dollar index, which tracks the US dollar against other currencies, is up nearly 18.5% this year. The dollar briefly rose above the euro and also moved closer to the pound sterling.
Not only have soaring interest rates contributed to the strength of the dollar, but the US dollar is also the world’s reserve currency and right now the world is struggling after Russia invaded Ukraine, which led to disruption of the energy market. This led to more struggles in Europe and the UK and drastically clouded the economic outlook for the region.
While the US economy could be heading into a severe recession, most economists would still consider its outlook relative to other parts of the world at this time. All of this has led investors and other stakeholders to turn to the dollar in a flight to safety.
But a strengthening dollar has historically not been good for Bitcoin, which tends to trade inversely to the dollar. If you think about the origins of Bitcoin, that makes some sense. Bitcoin was originally founded after the Great Recession when people had little faith in the traditional financial system, which at the time had just played a significant role in the downfall of the economy.
The goal was to create an alternative currency and financial system outside of government control, giving it less chance of being manipulated. So if there is a lot of confidence in the dollar, there is probably less confidence in crypto.
How the US Dollar Could Help Bitcoin
If a rising US dollar hurts Bitcoin, then a falling US dollar would likely help the world’s largest cryptocurrency. In general, the strength of the dollar has had a strong correlation with the Fed’s benchmark overnight lending rate, the federal funds rate.
While Fed members still expect to have to keep raising rates later this year, there are a decent number of investors who think the Fed is going to have to pivot sooner than the market thinks because the economy is heading into a deeper recession. this will not allow the Fed to be so restrictive with its policy.
However, even if that happens, the dollar could remain strong if it continues to be a safe haven for investors as other European economies struggle, so keep an eye out for geopolitical events like the Russian occupation. of Ukraine and the resulting energy crisis abroad. Still, with the dollar so hot right now, I think there is a chance that it will cool down in the near future, which could be a boon for Bitcoin.