Crypto’s Response to a Strong U.S. Dollar

This past year has been a wild ride for the cryptocurrency market with prices soaring and crashing. Inflation is a key concern for market participants, as it can have a major impact on asset prices. The recent increase in inflation has forced the Federal Reserve to face one of its biggest challenges in decades – keeping inflation in check. If central banks cannot effectively keep rates down, it could lead to further market volatility. The Fed announced yet another interest rate increase of 75 basis points on November 2 for a fourth time this year. Such rapid-fire rate hikes have resulted in the U.S. dollar surge in value.[1]

A strong dollar can impact the U.S. economy by making imports cheaper and exports more expensive. It also impacts assets like precious metals and cryptocurrencies that typically benefit from a weak greenback. With the appreciation of the dollar, cryptocurrencies have felt the weight. A rally could put more pressure on crypto prices which have already declined this year. Bitcoin, the most popular crypto, lost almost 60 percent this year alone.

The Crypto Market Cycle

Despite its nascent history, crypto has many market cycles. Like any market, blockchain assets have gone through cycles of highs and lows. A bullish trend can see prices rising as more investors enter the market, driving demand for certain currencies. However, this can also lead to speculation and overinflated prices.

On the other hand, a bearish trend will see prices dropping as investors become more cautious and unwind positions. This can be sparked by negative news or regulatory changes, but it also allows for creating excess supply and an opportunity to buy low and potentially profit if the market rebounds.

Bitcoin (BTCUSD), daily chart, courtesy of TradingView. The lower study shows its historic inverse correlation to the U.S. dollar.

History has shown Bitcoin to be inversely correlated with the U.S. dollar. Despite the recent rally of some cryptocurrencies, the relationship between crypto and the dollar indicates a strong greenback hinders crypto’s growth. As a trader, it is vital to be aware of how movements in the dollar can impact your holdings.

The U.S. dollar’s outperformance can create volatility in the crypto market and make it more difficult to trade profitably. For this reason, a strong dollar can be seen as a negative for cryptocurrencies. Even if the Fed paused its aggressive policy over fears of recession, Bitcoin experts aren’t bullish just yet, as each crypto market cycle lasts about four years, which means we may not see crypto recover until 2026.