Bitcoin inverse relationship with dollar weakening

• The US dollar is the global reserve currency, meaning it is a key influence on all risk assets
• Bitcoin has seen its negative correlation with the dollar pick up since the transition to a tight monetary regime, meaning it tends to strengthen when the dollar falls
• This inverse relationship has softened in recent weeks, as Bitcoin has failed to capitalise on dollar weakness arising from lower inflation in the US
• If history is to be followed and the correlation returns, Bitcoin could be in a place to advance

The status of the US dollar as the world’s reserve currency means it exhibits an enormous influence on risk assets not only in the US, but across the financial world. 

Bitcoin is no exception. We have seen an inverse relationship between the two assets play out over the last few years, meaning that as the dollar weakens, Bitcoin tends to strengthen, and vice-versa. 

This is for a couple of reasons. Firstly, Bitcoin is commonly quoted in USD due to, as mentioned above, the dollar being the global reserve currency. Therefore, it is simple math that when the denominator weakens (dollar), the ratio goes up, all else equal. 

However, the effects run deeper. Across international trade, debt and non-bank borrowing, the dollar reigns supreme. Firms issuing debt in foreign currency do so via the dollar an estimated 70% of the time (the euro is next with approximately 20%). Again, this is due to its status as the global reserve currency (we see the same in sovereign debt markets). As the dollar weakens, the cost of servicing this debt falls, greasing the wheels of global liquidity. Hence, risk assets tend to appreciate as the dollar falls, albeit a generalisation. 

For Bitcoin, we saw this in effect in 2022, as the dollar surged to a twenty-year high while Bitcoin was ravaged in line with risk assets across the market. Yet in the last month, the correlation has been fading and heading towards zero (i.e. no relationship at all). 

The above chart shows that this has happened a few times before in the last six months, only for the correlation to soon return (i.e. dip back down towards -1). The first major deviation came in March, when the regional bank crisis was triggered amid the sudden collapse of Silicon Valley Bank, sparking mass volatility in the market, with Bitcoin gaining nicely in the aftermath. More recently, the deviation…