Bitcoin drives cryptocurrency market
Increased dependence on the US dollar
Bitcoin holders better believe the dollar is in a bear market
Investing in the cryptocurrency market is not suitable for everyone. For example, volatility is much higher than other markets.
Sometimes, the prices of various cryptocurrencies rebound or drop dramatically for no apparent reason, leading to speculation that the market is manipulated. A lack of regulation may explain these moves, but investors certainly want to know what drives the cryptocurrency market.
The only answer is Bitcoin. Its share of the total cryptocurrency market capitalization is close to 50%.
In other words, if the price of Bitcoin is rising, Ethereum or other cryptocurrencies cannot fall. And vice versa - if Bitcoin enters a bear market, other cryptocurrencies will follow.
So the right question is not what drives the cryptocurrency markets, but what drives Bitcoin?
Lately, Bitcoin has been following developments in traditional currency markets. More precisely, it has been following the US dollar.
Bitcoin follows the strength of the U.S. dollar
The above chart shows the performance of Bitcoin from the end of 2021 to now. The orange above is the US Dollar Index (DXY).
It clearly shows that during the 2022 bear market, Bitcoin fell while the US dollar strengthened. EUR/USD fell below parity in 2022, going as low as 0.96. The Euro is a major component of the US Dollar Index, so the EUR/USD pair is a relevant pair to consider.
Bitcoin also fell, trading well below $20,000.
But then, in October 2022, the dollar bottomed. EUR/USD bounced back above parity and rallied into the year end.
It wasn’t until the end of the year that Bitcoin caught up with the dollar’s weakness. Eventually, it bounced back, too, rallying into 2023 and gaining more than 75% in four months.
To sum up, Bitcoin holders had better believe that the US dollar will weaken in the future. Otherwise, it will be difficult to hold Bitcoin if the US dollar enters a bull market.