Data challenges DXY’s correlation to Bitcoin price surge and corrections thesis

At the moment, there seems to be a general assumption that when the US dollar increases in value against other major global currencies, according to DXY, the effect on Bitcoin (BTC) negative.

Traders and influencers have issued alerts about this reversal correlation, and how the eventual reversal of the movement is likely to push the price of Bitcoin higher.

A CryptoBullGems analyst recently reviewed what the overbought DXY looks like after the Relative Strength Index (RSI) crossed 78 and could be the start of a correction for the Dollar Index.

Moreover, the technical analyst @1coin2sydes presents a bearish double top formation on the DXY chart, while Bitcoin is simultaneously forming a double bottom, which is a bullish sign.

Correlation changes over time, despite the general reverse trend

The periods of reversal movements between Bitcoin and DXY did not exceed 36 days. The correlation scale ranges from negative 1, which means that the selected markets move in opposite directions, to positive 1, which reflects a perfect and consistent movement. The variance or no relationship between the two origins will be represented by 0.

DXY Dollar Index 20-day correlation against Bitcoin. Source: TradingView

The scale has been below minus 0.6 since August 19, indicating that both DXY and Bitcoin have generally followed a reversal trend. In fact, the longest ever inverse correlation was from April 14 to May 20.

Saying that Bitcoin has an inverse correlation with the DXY would be statistically incoherent because it has had a negative 0.6 or lower on less than 30% of the days since 2021.

The dollar strengthened after the FOMC meeting minutes

On August 17, officials at the United States Federal Reserve indicated that additional interest rate hikes were needed for inflation to abate significantly, according to the minutes of the July 27 meeting.

DXY Dollar Index (orange, right) vs. Bitcoin (blue). Source: TradingView

The report caused the US dollar to rise against major global currencies, as the market gave the Federal Reserve a vote of confidence. Meanwhile, the bitcoin price fell by 11% in two days to $20,800, reinforcing the inverse correlation theory.

However, correlation does not imply causation, which means that it is impossible to conclude that the positive performance of DXY negatively affected the price of Bitcoin after the release of the minutes of the Federal Reserve meeting.

Correlation should not be used to predict short-term movements

Although pundits and influencers often use 20-day correlation data to explain daily price movements, one must analyze an extended time frame to understand the potential effects of the DXY indicator on the bitcoin price.

DXY Dollar Index (orange, right) vs. Bitcoin (blue), 2021. Source: TradingView

For example, 2021 provided some positive correlation between the DXY dollar index and Bitcoin. Some movements may have been anticipated by either side, but there were no long periods of reverse correlation.

More importantly, only crypto-related events may have distorted the scale, such as The first fund to be traded on the US Bitcoin exchange Released on October 19, 2021. Other examples include Tesla announces $1.5 billion investment in Bitcoin On February 8, 2021.

Moreover, analysts point out Chinese crackdown on mining May 2021 as the reason why the market fell below 40 thousand dollars. These events could not have been predicted by DXY, so any sustained correlation may have little impact during those periods.

Thus, those who wait for a turn in the DXY index before betting on the rise of Bitcoin have no statistical support. When positive (or negative) developments occur specific to the cryptocurrency industry, the historical correlation loses its significance.

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