Could Bitcoin Reclaim $40,000? The US Dollar Index Has An Answer

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Bitcoin posted its worst slump since March in the last three sessions, creating concerns among traders that the overheated price rally is gradually losing steam.

The flagship cryptocurrency fell 5.18 percent over the weekend and extended its correction at 09.29 GMT on Monday by another 7.29 percent to $ 35,388. At its intraday low, it changed hands for $ 32,265. Overall, the downtrend was Bitcoin’s largest three-day decline since March.

Bitcoin’s first major correction after its 100% rally in three weeks. Source: BTCUSD on TradingView.com Bitcoin’s first major correction after rallying 100% in three weeks. Source: BTCUSD on TradingView.com

Why Bitcoin fell

At the center of the bearish correction in the cryptocurrency was profit taking, led by concerns about its overbought status, the recovery of the US dollar index and rising yields on the 10-year US Treasury bill.

Traders appeared to have redistributed some of their profits to the cash and bond markets, largely because the Federal Reserve had suggested cutting its bond-buying program through January 2022, according to the minutes of their December meeting released Wednesday.

This coincided with Bitcoin hitting its all-time high of over $ 41,000 two days later, making it an ideal opportunity for traders to take profit and redistribute capital.

“Time to take some money off the table,” said Scott Minerd, chief investment officer at Guggenheim Investments, in a tweet on Monday. “Bitcoin’s parabolic surge is unsustainable in the short term.”

Still, the recent Bitcoin price correction hasn’t stopped traders and investors from focusing on the cryptocurrency’s long-term prospects. This is due to a variety of fundamental catalysts that are said to provide bulls with a setback.

Additional incentive

The Fed will not turn to the tantrum until the US economy has recovered to what appears satisfactory. Chairman Jerome Powell has already admitted that the inflation rate is expected to rise above 2 percent. He also said his office will continue to buy bonds at the same pace until the US labor market bounces back significantly.

However, a broader recovery would only emerge after the US government promised to provide additional fiscal stimulus. President-elect Joe Biden has confirmed that his first few days at the White House would mainly be focused on raising trillions of dollars in aid.

The prospect of a rising budget deficit would put the US dollar under pressure, at least in the medium term. Traders and investors have positioned Bitcoin to act as a safe haven against the possible decline in the greenback. This partly explains the recent correction, which coincided perfectly with the dollar’s rebound over the past three days of trading.

The US dollar index is targeting key areas of resistance to confirm a bullish reversal. Source: DXY on TradingView.com The US Dollar Index is targeting major resistance areas to confirm a bullish reversal. Source: DXY on TradingView.com

The US dollar index, which measures the strength of the greenback against a pool of foreign currencies, is now breaking out of its falling channel to the upside. It is now targeting two critical areas of resistance as shown in the chart above and expects bearish fundamentals to move back down.

“Bitcoin is the beneficiary with the highest beta of the liquidity-driven quarantinestimulus Commerce, ”said Oliver Renick, anchor of TDA Network. “COVID curves are peaking and [monopoly] Handover to Fiscal is [a] More [important] Catalyst.”

With that, the cryptocurrency is on the way back to $ 40,000.