Trading Bitcoin can be tricky and 3 key macroeconomic?

Recently, Bitcoin analyst and Cane Island Digital founder Timothy Peterson shared a cheat sheet encompassing 8 macroeconomic factors that impact Bitcoin price. Let’s look at the top 3 metrics to understand how they correlate with Bitcoin price and offer insight into optimal buying and selling opportunities.

US Dollar Index (DXY)

The DXY measures the US dollar value against a basket of major currencies. It is influenced by, among others, interest rates, geopolitics, domestic economic conditions, and foreign exchange reserves held in USD. A stronger DXY tends to impact Bitcoin’s price negatively. Conversely, investors turn to risk assets, equities, and Bitcoin when confidence in the index wanes. This inverse correlation has been observed for years and continued through 2024, as shown in the recent NYDIG research.

Since September 2024, the DXY has been on an upward trajectory, reaching 110, its highest point in over two years. Some analysts think this presents a bearish outlook for Bitcoin. However, according to a senior technical strategist at Forex.com, this rally is nearing a long-term resistance level. If this resistance holds, it could reverse the trend, potentially creating a more favorable environment for Bitcoin. Since its peak on Jan. 13, DXY has dipped 1.27%, but the incoming Trump presidency could reverse this trend, depending upon the policies of his cabinet.

Federal Reserve and Bitcoin 

Federal Reserve interest rates influence borrowing costs across the US. Decreasing rates make borrowing cheaper, boosting demand for risk-on assets. Conversely, rising rates shift investor preference toward yield-bearing assets like bonds. Bitcoin, too, is considered a risky asset. Researchers from the Swiss bank Piguet Galland have studied the correlation between BTC and interest rates over time.

The graph above shows that the inverse correlation emerged after the post-Covid interest rate cuts when BTC surged to a cycle high of almost $69,000. Trading Bitcoin was followed by sharp rate hikes in 2022, during which BTC dropped to a cycle low of $16,000. This pattern suggests that Bitcoin is still considered a risk-on asset.

Market Reactions to CPI and Bitcoin’s Role

Market expectations often matter more than the raw numbers when trading the monthly CPI release. For instance, the December 2024 CPI, which showed a 2.9% annual inflation rate, met market expectations. The Core CPI, excluding food and energy, came in at 3.2%, better than the anticipated 3.3%. Although still above the Fed’s 2% target, it relieved the markets. Immediately following the news, the S&P 500 climbed 1.83%, the Nasdaq 100 2.3% and Bitcoin gained 4.3%.

So far, “with inflation, good news is good news” for Bitcoin, as quantitative market analyst Benjamin Cowen put it. Decreasing inflation tends to push BTC upward. However, there’s another side to Bitcoin—its role as digital gold, often touted as a hedge against inflation. In this paradigm, the increasing inflation should drive BTC higher as more people turn to Bitcoin to protect against the depreciating US dollar. As Bitcoin adoption grows, this scenario could materialize, inverting the current correlation.

Bond yields influence on Bitcoin

Bond yields, directly correlated with the Fed’s rates and inflation, serve as another valuable metric for Bitcoin traders. Trading Bitcoin, High yields on low-risk government bonds can reduce the appeal of riskier assets like Bitcoin that do not generate yield.

Government bonds are also directly related to the notion of debt. When governments issue debt (sell more bonds) to finance spending, the increased supply can lead to higher yields. If the debt reaches unsustainable levels, there is a risk of dollar debasement. The US adding $13 trillion to its debt since 2020 is unsettling news for the economy and, by extension, Bitcoin in the short term. In the longer run, however, this could increase interest in Bitcoin as an alternative currency.