Bitcoin price faces risks? The golden cross of the US dollar strength index has been confirmed.

Bitcoin price risks due to confirmed golden cross of USD strength index.

Author: Marcel Pechman, Cointelegraph; Translation: Song Xue, LianGuai

On September 22nd, the US Dollar Index (DXY) reached its highest level in nearly 10 months, indicating growing confidence in the US dollar compared to other fiat currencies such as the British pound, euro, yen, and Swiss franc.

US Dollar Index “Golden Cross” Confirmed

In addition, investors are concerned that the surge in demand for the US dollar could pose challenges for Bitcoin and cryptocurrencies, although these concerns may not necessarily be related.

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US Dollar Index (DXY). Source: TradingView

When the 50-day moving average crosses above the longer 200-day moving average, the DXY index confirms a golden cross pattern, which is often seen by technical analysts as a precursor to a bull market.

Impact of Economic Recession and Inflation Risks

Although some investors believe that historical trends are solely determined by price patterns, it is worth noting that despite concerns about inflation and economic growth in the world’s largest economy, the US dollar remained strong in September.

Market expectations for US GDP growth in 2024 hover around 1.3%, lower than the average growth rate of 2.4% in the previous four years. This slowdown is attributed to factors such as monetary policy tightening, rising interest rates, and weakened fiscal stimulus.

However, not every rise in the DXY index reflects increased confidence in the Federal Reserve’s economic policies. For example, if investors choose to sell US government bonds and hold cash, it indicates that the most likely scenario is an imminent economic recession or significant inflation increase.

When the current inflation rate is 3.7% and trending upward, there is little incentive to seek a yield of 4.4%, prompting investors to demand a 5-year US Treasury bond yield of 4.62% as of September 19th, the highest level in 12 years.

US 5-year Treasury bond yield. Source: TradingView

This data clearly indicates that investors are avoiding government bonds and favoring the safety of cash positions. This may seem counterintuitive at first glance, but it aligns with a strategy of waiting for more favorable entry points.

Investors expect the Federal Reserve to continue raising interest rates, enabling them to achieve higher future yields.

If investors lack confidence in the Federal Reserve’s ability to curb inflation without causing significant economic damage, there may not be a direct link between the strengthening of the US dollar and a decrease in demand for Bitcoin. On the one hand, there has indeed been a decline in interest in risk assets, as evidenced by the negative performance of the S&P 500 index in September (-4.3%). Additionally, investors realize that hoarding cash, even in money market funds, does not guarantee stable purchasing power.

More circulating funds are beneficial to Bitcoin price

As the government continues to raise the debt ceiling, investors face the risk of currency devaluation, which makes nominal returns less important due to the increase in money supply. This explains why scarce assets such as Bitcoin and some leading technology companies may still perform well during an economic slowdown.

If the S&P 500 continues its downward trend, investors may exit the risk market, regardless of its scarcity or growth potential, at least in the early stages. In such an environment, Bitcoin may indeed face negative performance.

However, it is worth noting that this analysis overlooks the fact that the same pressure from inflation and recession may increase the money supply, either through additional issuance of government bonds or the Federal Reserve’s purchase of bonds in exchange for US dollars.

In either case, the increase in market liquidity tends to be beneficial for Bitcoin, as investors may seek shelter in alternative assets to guard against “stagflation” – a situation characterized by stagnant economic growth and rampant inflation.

Therefore, the DXY gold cross does not necessarily have a net negative impact on Bitcoin, especially over a longer time frame.

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