Who Will Win the Game – Dollar vs Bitcoin 

The biggest threat to economic growth is inflation. People’s savings and those on fixed incomes are devoured by it. The Federal Reserve’s first objective is obviously to control inflation, and the only effective tool at its disposal is raising interest rates. As anticipated, the Fed has increased interest rates many times to combat inflation, sending investors looking for haven assets like the US dollar. 

The dollar index (DXY) soared exponentially to current levels near 113 after forming a double bottom in January 2021 and May 2021, as shown in the graphic below. The large-scale factors that have caused the dollar to reach these levels are now widely known and well-documented. 

A very hawkish Fed wants to maintain a healthy balance between inflationary pressures. Equity underperformance and inverted yield curves are typical of this late-cycle economy. 

Government bond yield curves are a key metric in the financial markets. When short-term yields are greater than long-term yields, the yield curve has an “inverted” shape. This happens when investors forecast a future interest rate that is lower than the current rate. 

Equities, usually referred to as stocks, are by their very nature risky. They make no dividend payout promises. As a result, stocks suffer when the economy is about to enter a recession because the profitability of such risky assets will be in danger. And, as predicted, the majority of tech equities have fallen more than 30%, with some exceptions. 

What it means for Bitcoin? 

Bitcoin (BTC), which was initially highly uncorrelated with the rest of the financial markets, has recently fallen victim to macroeconomics. BTC, which is presently trading above $20,000, has been swayed by every significant economic shock, such as US CPI statistics, Europe’s energy crisis, the Russia-Ukraine war, and so on. With such a connection to the global economy, BTC and tech stocks will be treated on a par, if not equal footing. Furthermore, as demonstrated in the graph below, DXY has had an inverse effect on the performance of BTC. As can be seen, a bearish dollar corresponds to a bullish Bitcoin, and vice versa. 

So, Who Will Win? 

Winning is all about perspective. In terms of influence, the US dollar will most certainly dominate the rest of the world’s currencies, including Bitcoin (which was created as an alternative form of currency) shortly. In terms of performance, despite the present slowdown in the crypto market, BTC has remained one of the top-performing assets in the last ten years, with a parabolic climb.  

As a result, investors should be aware of the cyclical character of markets, which vary between risk-on and risk-off investments. Rather than marrying into one investment concept, it is best to objectively assess the macroeconomic climate, modify risk tolerances, and deploy bullish or bearish methods accordingly.