The Impact of a Strong U.S. Dollar on Cryptocurrencies

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Crypto’s Response to a Strong U.S. Dollar 

This past year has been a wild ride for the cryptocurrency market with prices soaring and crashing. Inflation is a key concern for market participants, as it can have a major impact on asset prices. The recent increase in inflation has forced the Federal Reserve to face one of its biggest challenges in decades – keeping inflation in check. If central banks cannot effectively keep rates down, it could lead to further market volatility. The Fed announced yet another interest rate increase of 75 basis points on November 2 for a fourth time this year. Such rapid-fire rate hikes have resulted in the U.S. dollar surge in value.[1]

A strong dollar can impact the U.S. economy by making imports cheaper and exports more expensive. It also impacts assets like precious metals and cryptocurrencies that typically benefit from a weak greenback. With the appreciation of the dollar, cryptocurrencies have felt the weight.  A rally could put more pressure on crypto prices which have already declined this year. Bitcoin, the most popular crypto, lost almost 60 percent this year alone. 

The Crypto Market Cycle

Despite its nascent history, crypto has many market cycles. Like any market, blockchain assets have gone through cycles of highs and lows. A bullish trend can see prices rising as more investors enter the market, driving demand for certain currencies. However, this can also lead to speculation and overinflated prices. 

On the other hand, a bearish trend will see prices dropping as investors become more cautious and unwind positions. This can be sparked by negative news or regulatory changes, but it also allows for creating excess supply and an opportunity to buy low and potentially profit if the market rebounds. 

Bitcoin (BTCUSD), daily chart, courtesy of TradingView. The lower study shows its historic inverse correlation to the U.S. dollar.

History has shown Bitcoin to be inversely correlated with the U.S. dollar. Despite the recent rally of some cryptocurrencies, the relationship between crypto and the dollar indicates a strong greenback hinders crypto’s growth. As a trader, it is vital to be aware of how movements in the dollar can impact your holdings. 

The U.S. dollar’s outperformance can create volatility in the crypto market and make it more difficult to trade profitably. For this reason, a strong dollar can be seen as a negative for cryptocurrencies. Even if the Fed paused its aggressive policy over fears of recession, Bitcoin experts aren’t bullish just yet, as each crypto market cycle lasts about four years, which means we may not see crypto recover until 2026. 

Protect Your Investment

Navigating a crypto bear market can be challenging for traders, but there are some strategies that can help weather the storm. One option is to diversify your portfolio, helping you have exposure to different cryptocurrencies and blockchain projects. It’s also important to keep a long-term perspective and remember that market fluctuations are just part of the crypto environment. Focusing on fundamental factors such as technology and adoption instead of short-term price movements may also help.

Many traders have made and lost fortunes in this volatile market, and it remains to be seen when the current bear market will give way to another bull run. Keeping a level head and taking measured informed decisions can go a long way in helping to weather this crypto winter.

Investing in cryptocurrencies involves significant risks. See the Investment and Trading Disclosures Booklet for more information on investing and trading in cryptocurrencies.

Diversification and asset allocation do not ensure future performance, success or guarantee against loss.


[1] Why A Strong Dollar Is Not As Good As You Think, Forbes, Kenneth Rapoza, Oct 28, 2022 https://www.forbes.com/sites/kenrapoza/2022/10/28/why-a-strong-dollar-is-not-as-good-as-you-think/?sh=739a630b3cad

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