The US Dollar and Cryptocurrency Market Cycles Explained

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In this post, I’ll be providing an in depth explanation of the (inverse) correlations of Bitcoin, Ethereum, Bitcoin Dominance, and the US Dollar Index. This will help traders understand the general trends of each assets and indices, as well as what to look for the next measured move.

I have divided the chart by the 1-2 months, in order to demonstrate clear movements and trends. Ethereum was chosen to represent the entire alt coin market, as it has acted as the leading altcoin for the recent bullish rally.

Bitcoin (BTC) is marked by the orange graph, Ethereum (ETH) by the grey graph, Bitcoin Dominance (BTC.D) by the prurple graph, and the US Dollar Index (DXY) by the green graph.

March – April 2020
- To begin with, starting in March, up to the end of April, we can see clear trends for all assets and indices.
- Bitcoin and the US Dollar Index show a clear inverse correlation, as Bitcoin corrects heavily while DXY experiences a breakout.
- However, after Bitcoin’s price recovers, their inverse correlation is not demonstrated too clearly
- From March to the beginning of April, Bitcoin’s price rises more rapidly than that of Ethereum.
- This leads to the Bitcoin dominance showing a sharp rise.
- However, afterwards, ETH demonstrates a similar degree of uptrend – a correlated move with Bitcoin – and this leads the Bitcoin dominance to cool down.

April – June 2020
- From the end of April, ETH’s price starts correcting while Bitcoin’s price rises at a very rapid pace
- This leads to another breakout in Bitcoin dominance, signifying that capital is flowing from altcoin markets to Bitcoin.
- Meanwhile, the US Dollar Index demonstrates a rather correlated move with Bitcoin until the Beginning of June.
- As the DXY drops harder, both Bitcoin and Ethereum’s price rises rapidly.
- As such, Bitcoin Dominance drops down.

June – July 2020
- During this period, there was minimal volume and movement in Bitcoin and altcoins.
- As a result, Bitcoin dominance also ranged sideways for a while
- Around mid-July, however, Ethereum broke out slightly, marking the beginning of breakouts for other altcoins as well, while Bitcoin continued to consolidate
- As a result, Bitcoin dominance fell significantly
- An interesting thing to note is how the DXY starts showing a clearer correlation with Bitcoin Dominance once again

July – September 2020
- During this time, we can see a clear correlation between Bitcoin and altcoins, specifically Ethereum, and their inverse correlation with Bitcoin Dominance and the US Dollar Index
- Notice that there is a spike on the Bitcoin dominance graph, while the overall trend suggests a downtrend
- This is because Bitcoin breaks out first, providing confirmation of a bullish market
- As capital flows in to the cryptocurrency market, people also seek opportunities to invest in altcoins, which are much more volatile, yet potentially more profitable
- The US Dollar index demonstrates a very clear inverse correlation with Bitcoin’s price.

September 2020
- We saw a correction in the cryptocurrency market in the beginning of September
- Following the previous context, the drop we see for Bitcoin not only happens ahead of Ethereum, but also to a lesser degree.
- Ethereum follows Bitcoin’s move in a lag, and as it’s an altcoin, it demonstrates more volatility
- Reflecting this move in the cryptocurrency market, Bitcoin dominance breaks out once again
- Being more volatile, Ethereum’s dead cat bounce is stronger than that of Bitcoin, showing a sharp drop in Bitcoin dominance around mid-September
- The US Dollar Index shows some recovery in its trend along with Bitcoin Dominance.
- This means that with the recovery of the DXY, people are reluctant to hold altcoins that are highly risky and volatile

October 2020
- We are now seeing movement for these four graphs in October.
- Bitcoin and Ethereum demonstrate a strong bullish uptrend, while Bitcoin Dominance and the US Dollar Index continue to fall
- This indicates that people are more willing to invest heavily into the cryptocurrency market, in both Bitcoin and altcoins.

Summary
When the US Dollar Index (DXY) drops, people look to invest their capital. The Dollar Index is greatly affected by macroeconomic factors. Considering that the Federal Bank is pumping out money supply at an unprecedented rate, it’s not surprising to see the US Dollar Index drop so drastically over time. The increase in money supply essentially means that the money you hold will lose its value if it’s not invested.

As such, we can clearly see that investors look to take part in the cryptocurrency market, which is clearly demonstrated through the DXY’s inverse correlation with Bitcoin. People are more willing to invest in Bitcoin, the harder the value of the US Dollar falls. When Bitcoin provides bullish confirmation through breakouts and high trading volume, investors gain more confidence in the market, and capital flows into the altcoin markets.

This study on the (inversely) correlated trends in the cryptocurrency market demonstrate that investors identify altcoins as a high-risk high-return market, while they view Bitcoin as a digital store of value.

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