Bitcoin, the world’s leading cryptocurrency, has become a popular investment choice for individuals and institutions worldwide. The volatile nature of Bitcoin has made it an attractive asset for traders, investors, and speculators. However, the correlation between Bitcoin and the US dollar, the world’s primary reserve currency, has long been a subject of debate. This article investigates the correlation between Bitcoin and the US dollar over the years. Cryptocurrency price drops are sometimes gradual and to know more about Bitcoin Value to Drop, click here!
Introduction to Bitcoin-Dollar Correlation
Bitcoin, created in 2009 by an unknown individual or group of individuals under the pseudonym Satoshi Nakamoto, is a decentralized digital currency that operates on a peer-to-peer network. Bitcoin transactions are recorded on a blockchain, which is a distributed ledger technology that ensures transparency, security, and immutability of data. Bitcoin’s price is determined by supply and demand dynamics and is not influenced by any central authority or government.
The US dollar, on the other hand, is the world’s primary reserve currency and is issued by the Federal Reserve System, the central bank of the United States. The US dollar is used as a medium of exchange, a unit of account, and a store of value worldwide. The US dollar’s value is influenced by various factors, including inflation, interest rates, economic growth, and geopolitical events.
Positive Correlation between Bitcoin and US Dollar
One argument for a positive correlation between Bitcoin and the US dollar is that Bitcoin’s price is influenced by the value of the US dollar. When the US dollar appreciates, Bitcoin’s price tends to fall, and when the US dollar depreciates, Bitcoin’s price tends to rise. This is because Bitcoin is denominated in US dollars in most exchanges, and any changes in the value of the US dollar will have an impact on Bitcoin’s price.
Negative Correlation between Bitcoin and US Dollar
One argument for a negative correlation between Bitcoin and the US dollar is that Bitcoin is often seen as a speculative asset, and investors may move their funds from US dollars to Bitcoin during periods of uncertainty or market volatility. This can lead to a negative correlation between Bitcoin and the US dollar, as the value of the US dollar may fall while Bitcoin’s price rises.
Empirical Investigation
To investigate the correlation between Bitcoin and the US dollar empirically, researchers analyzed daily closing prices of Bitcoin and the US dollar index (DXY) from January 2011 to September 2021. The US dollar index is a weighted average of the value of the US dollar against a basket of major currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
The study found that the correlation between Bitcoin and the US dollar was not consistent over the years. From 2011 to 2015, the correlation between Bitcoin and the US dollar was weakly positive, with a correlation coefficient of 0.19. From 2016 to 2019, the correlation turned negative, with a coefficient of -0.28. However, from 2020 to 2021, the correlation has turned positive again, with a coefficient of 0.25.
The researchers also found that the correlation between Bitcoin and the US dollar was influenced by various factors, including inflation, interest rates, and global economic and geopolitical events. For example, during the COVID-19 pandemic in 2020, the correlation between Bitcoin and the US dollar turned positive, as investors turned to Bitcoin as a safe-haven asset during market uncertainty.
Implications for Investors
The findings of this study have implications for investors who trade Bitcoin against the US dollar. Investors who believe in a positive correlation between Bitcoin and the US dollar may use technical analysis to predict price movements and make trading decisions. On the other hand, investors who believe in a negative correlation may use fundamental analysis to analyze economic and geopolitical events that may affect the value of the US dollar and make trading decisions based on that analysis.
Conclusion
In conclusion, the correlation between Bitcoin and the US dollar is not consistent over the years and is influenced by various factors. Investors who trade Bitcoin against the US dollar may use technical or fundamental analysis to make trading decisions, depending on their beliefs about the correlation between the two assets. The Crypto Loophole is an online trading platform that enables traders to speculate on the price movements of Bitcoin and other cryptocurrencies against the US dollar and other major currencies.
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