The US dollar (USD) is strong these days, and the Bitcoin (BTC) market seems to be enjoying it more than in recent months.
Indeed, right now the Dollar Index, which measures the value of the US dollar against a global basket of other fiat currencies, is around 104.5 points, which is roughly similar to what it was in early January.
In contrast, Bitcoin’s price is markedly higher, since it was well below $17,000 at that time, while today it is well above $24,000.
But it’s the dynamics of February and especially March that are somewhat surprising.
USD’s decline in January
In January, after very briefly touching a peak at over 105.5 points, the Dollar Index (DYX) began to fall. It could hardly be a coincidence that when DXY touched that peak the price of Bitcoin was still suffering below $17,000.
It is likely no mere coincidence either that when the Dollar Index began to fall below 103 points just before mid-January, the price of BTC began a small bull run that actually brought it up to $24,000.
Markets have often rewarded risk-on assets like Bitcoin when investors and speculators sell dollars causing their market value to fall.
Thus this dynamic is completely understandable and, in hindsight, also relatively predictable, as the Dollar Index still appears too strong in relation to the strong inflation that the US has been going through for several months now.
BTC’s failure to fall in February
On the other hand, what may seem less understandable, and entirely unpredictable, is that in February when DXY rose again, the price of BTC instead did not fall again.
In fact, on 24 February, when the Dollar Index returned above 105 points, the price of Bitcoin was still above $24,000.
It is not easy to find an explanation for this dynamic, except to recall that during the last months of 2022 the price of Bitcoin had probably fallen too far, and perhaps it was simply looking for a good opportunity to return to shares more in line with its long-term trend.
The anomaly of March: the comparison between the BTC and USD markets
Even more curious and interesting is what is occurring in March.
In fact, in the first decade of the month, the Dollar Index continued to rise, reaching almost 105.8 points, while the price of Bitcoin fell all the way below $20,000.
This is not at all strange, not least because those days were marked by the beginning of the global banking crisis, which later resulted in the failure of Silicon Valley Bank.
At that point, though, Bitcoin reacted.
It was a major reaction, as in the space of just two days the price of BTC rose from $20,000 to $25,000, and then settled below that threshold.
Admittedly, the US dollar (USD) lost some value in those two days, but yesterday it returned to a significant rise, with DXY returning to close to 105 points.
Despite something of a small surge from 103.5 to 104.9 points in less than 24 hours, Bitcoin’s price hardly moved. It simply fell from above to below $25,000, remaining well above $24,000.
This anomaly seems to have a very interesting explanation.
As soon as news broke of the closure of Silicon Valley Bank (SVB), which constitutes the second largest banking failure in the entire history of the US and was the precursor to a series of other banking crises, many account holders began to wonder if their funds deposited with banks were safe.
As the inevitable answer is no, considering that the funds deposited in SVB accounts were bailed out by an extraordinary and far from obvious intervention by the Fed, many have begun to look for alternatives.
Over the weekend, with banks closed, more than a million new Bitcoin addresses were created, a sign that many began to consider Bitcoin as a possible alternative.
Obviously this led them to buy BTC in the market, increasing the buying pressure.
So not only did the price of Bitcoin rise over the weekend, but it held up very well to the financial storm that has hit the markets in recent days due to fears regarding the safety of bank deposits.
Does the market prefer BTC to USD?
It would not be correct to say that the market is preferring BTC to USD at this time, partly because the still decidedly high value of the Dollar Index clearly shows a clear bias toward USD, but it is possible to say that perhaps it is appreciating BTC a little more than it has in the past.
This is clear from the comparison with the Nasdaq.
Over the past few days, Bitcoin’s price has risen 26%, while the Nasdaq 100 index has been limited to a paltry +2. 7%.
BTC has recovered the value it had a month ago, while the Nasdaq 100 is still almost 5% below.
This article has been originally published at: https://en.cryptonomist.ch/2023/03/16/btc-usd-market-making-choice/