December 4, 2021

Growth of the dollar index and exchange balances

The DXY Index (Dollar Index), which measures the value of the US dollar against a basket of other fiat currencies, continues to strengthen throughout 2021, incurrently trading at 95.57. While many investors are rightfully focused on consumer and asset price inflation in the United States, the dollar's growing strength against other foreign currencies should be watched.

Dollar index

Since the dollar is the world's reservecurrency, huge amounts of denominated debt exist outside the jurisdiction of the Federal Reserve Board. The result is that the rise of the dollar against other foreign currencies (even if it depreciates in relation to real goods, services and financial assets) can lead to a collapse of the financial market due to the “short-squeeze” of the dollar. debtors are forced to sell whatever dollar-denominated assets they may have to meet their obligations. While it was driven by economic lockdowns due to COVID-19, the March 2020 rise in DXY coincided with a crash in global financial markets. This is not a coincidence, but rather simple math. For most global financial assets, including Bitcoin, the dollar is the denominator in a trading pair, so if this denominator increases in value, then the asset's value falls.

Dollar Index and Reverse BTC

It is noteworthy that for most of the2020, there was a very tight inverse correlation between the DXY and Bitcoin, as the weakening dollar boosted all dollar-denominated financial assets. At the moment, however, this inverse relationship is not relevant, and the DXY index has been growing for most of 2021 in tandem with the price of bitcoin.

Dollar Index and Reverse BTC

Does this mean Bitcoin will return to the mark$ 20 thousand due to the strengthening of the dollar? Absolutely not, as Bitcoin goes through its own monetization process and adoption curve, however, the strength of the dollar against other fiat currencies is noticeable and should be recognized and monitored by investors of all asset classes, because if the trend continues, it could lead to deleveraging across all markets and present a fantastic buying opportunity for those looking to buy Bitcoin at a fraction of the cost.

It is important to note that the dollar index can rise incoupled with strong CPI numbers, and the steady DXY uptrend towards early 2020 levels will no doubt create headwinds for other asset classes traded against the dollar, including Bitcoin.

Stock market balances at three-year lows

Since the price of bitcoin fell below $ 60k.Let's brush up on the current state of the exchange balances and the activity of the intra-exchange bitcoin flows. At the macro level, the decline in the supply of bitcoin on exchanges continues, and the share of bitcoin on exchanges of all bitcoin in circulation yesterday hit another three-year low. The long-term decline in the exchange balance, which began in March 2020, is still relevant.

The share of the exchange offer at a three-year low

During previous record highs in pricebitcoin, we have seen an increase in the share of the exchange offer due to the fact that more and more bitcoins were entered on exchanges to be sold at high values. However, balance sheet supply has dropped 9%, more than 250K BTC, from its June peak this year, and the trend seems to continue. If this were the top of the macro cycle, we would see more bitcoins being traded on exchanges for sale.

Exchange offer fell 9% since June

Another way to view the activity of the exchangebalance sheet - pay attention to the daily volume of the flow of funds, which can be either an inflow or an outflow. Exchange wallets and addresses are classified using proprietary data processing, statistics and clustering methods from the Glassnode service. In general, we need to be careful when interpreting this data, as stock classifications are difficult to make and are constantly changing as stock exchange practices change. For example, suppose there is a signal that shows an outflow of 10 thousand BTC from the exchange on a certain day. It is best to wait a few days for confirmation that this is not an uncategorized internal exchange transfer.

To accommodate changes in daily volume andlooking at the broader trends, we can look at the 14-day moving average of the data. Compared to all-time highs and previous peaks, we previously saw much higher inflow activity in the market, which is not present today. If this were a macro top, we should see a higher rate of inflows to exchanges, which would indicate an increase in sales.

Bitcoin Exchange Stream, 14-Day MA

As long as stock exchange balances hit new lowsover-the-counter balances are rising. A couple of months after a prolonged market drawdown in March 2020, there was a steady growing correlation between OTC balances and the price of Bitcoin. This is a unique period compared to the last five years. And also another way to illustrate the influence of the dynamics of the supply shock on the price, which we discussed earlier. In the entire history of Bitcoin, we have never seen it leave exchanges at such a rate. Assuming there is no Bitcoin in the market, less supply is available to buy, which puts upward pressure on price as new demand emerges.

90-Day Correlation of Bitcoin OTC Balances and Price

90-Day Correlation of Bitcoin OTC Balances and Price

BitNews disclaim responsibility for anyinvestment recommendations that may be contained in this article. All the opinions expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.

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