The price of Bitcoin (BTC) has been struggling to stay above $56,000 on April 20, which whale clusters pinpointed as a crucial short-term price level.
Yet the U.S. dollar index (DXY) has continued to fall in recent weeks, dropping to its lowest point in seven weeks to 90.85.
Why is this a concerning trend?
Alternative stores of value in the likes of Bitcoin and gold are priced against the U.S. dollar. Hence, when the dollar drops, the value of Bitcoin should theoretically increase as BTC trades against the dollar.
In recent days, however, Bitcoin has performed poorly following the highly anticipated public listing of Coinbase.
The trend is concerning because the probability is higher for Bitcoin to see an uptrend when the dollar is declining as shown by the inverse relationship in the chart above.
But in recent days, Bitcoin has been having a hard time remaining above a key whale cluster level at $56,000, which indicates that there is heavy selling pressure on BTC, particularly as the price is struggling to rebound above the 50-day moving average (green line in the chart below).
Moreover, some analysts say the dollar may see a relief rally. If this occurs, it should create a less favorable environment for Bitcoin to regain its momentum.
In a note to clients obtained by CNBC, Commerzbank strategist You-Na Park-Heger said that the eurozone’s vaccine optimism and the Federal Reserve’s firm stance on inflation likely drove the dollar’s decline.
While this put an immense amount of pressure on the dollar in the short term, in the weeks to come, Park-Heger said that the trend could possibly change.
She said:
“The economic recovery in the U.S. might drive up inflation expectations further, fuelling rate hike speculation. The news situation in the euro zone in connection with corona might change again as uncertainty remains high.”
But not everyone agrees that the dollar will resume its uptrend. Researcher Credit Agricole’s Valentin Marinov, for example, says that the attractive yields in alternative markets are putting pressure on the dollar.
Marinov explained:
“Indeed, the USD rally is all but distant memory by now and the currency’s underperformance seems to reflect the apparent divergence in the outlook between the slumping UST yields and the rather perky bond yields elsewhere. This is almost the exact opposite of the moves we saw in March.”
Co-founder of 10T Holdings co-founder Dan Tapiero also expects more downside for the dollar, stating that the USD bear market hasn’t even started.
How early is it still for #Bitcoin?
The US dollar bear market hasn’t even begun yet.
— Dan Tapiero (@DTAPCAP) April 19, 2021
In any case, the futures market and high leverage appear to have more of an immediate impact on Bitcoin’s price while a weakening dollar should continue to be a bullish factor for BTC in the medium to long terms.
Things might change for Bitcoin in near term
In the short term, Bitcoin could get a boost from some bullish news and regain technical momentum. For example, Venmo’s support for Bitcoin and Ethereum saw the price bounce back to $56,000.
Beginning today over 70 million customers will be able to buy, hold and sell crypto directly within the Venmo app as the feature gets rolled out over the next three weeks.
Additionally, WeWork has announced it will be accepting cryptocurrency payments and holding them on its balance sheet.
In the foreseeable future, this renewed momentum could allow Bitcoin to regain its footing after a week of rare underperformance in tandem with the USD.