Glassnode report: Bitcoin fell below the $40,000 mark three times, and the continued strength of the US dollar will add more resistance to Bitcoin

A recent report from Glassnode analyzed the impact of the macro environment on the price action of the U.S. dollar and Bitcoin, delving into the systematic sell-off that spread across all asset classes. Despite Bitcoin’s robust structure, a stronger dollar and high inflation rates have shaken the market. The Federal Reserve’s May meeting is imminent, and developments on the Ukrainian conflict front have added significant uncertainty.

In April this year, Bitcoin fell below $40,000 for the third time. A strong dollar put pressure on asset risk amid a sluggish macro economy. As a result, the trading range narrowed to $38,500 and $42,000.

Figure 1

Currently, the inverse relationship between Bitcoin and the U.S. Dollar Index (DXY) (Figure 2) suggests that if the U.S. Dollar Index remains above the 102 resistance level, this could weaken Bitcoin and price action could fall back to the $35,000 and lower region, especially if the rise in DXY can be attributed to tighter monetary policy. The dollar could continue to move higher as the U.S. plans to export more natural gas to supplement supplies in Europe. This catalyst, further explored below (Figure 5), could raise the critical threshold that DXY can reach before the cryptocurrency market oscillates again. However, a failure of DXY to break above the aforementioned resistance level could push Bitcoin into a channel above $42,000.

Figure 2

The development of the dollar depends largely on the course of action of the Fed. Rising inflation and a possible 50 basis point rate hike in early May could strengthen the dollar index. Figure 3 suggests the end of the Fed's massive bond buying spree, but the tapering is not as pronounced compared to the Great Depression.

Figure 3

Overall, we follow a consensus that the Fed will tighten policy faster given that input prices will increase inflation. Supply chains have been under pressure since the outbreak, while demand has generally remained strong, pushing up producer prices. This means that many complex changes are creeping into all levels of the supply chain and exacerbating a vicious cycle, with Amazon's 5% fuel and inflation surcharge on third-party sellers on its platform being a vivid example. This policy change affects the cost base of about 2 million sellers on the platform, who generated more than $80 billion in revenue for the company in 2020 alone.

A stronger dollar, combined with high inflation rates, will accelerate the cost of goods, services, and construction (Figure 4), which will add more headwinds to Bitcoin and other risky assets.

Figure 4

From a USD perspective, we compare the spread between the two currencies to gauge upcoming moves based on the supply and demand dynamics between the two. The difference in 5-year yields between European, Japanese and US bonds suggests a stronger incentive to borrow in USD, which could drive up demand for the dollar (Figure 5).

Figure 5

Note that a weaker Euro alone could have an upside impact on DXY, and we see ongoing risk factors from the war in Ukraine threatening the Euro. For example, the halt to gas imports from Poland and Bulgaria on April 27th hit the Euro and helped the Dollar Index rise well above the key 102 level to 103.5. There are countless possible escalations that could lead to further Euro weakness. However, it is unknown to what extent specific catalysts related to the war would have a negative impact on cryptocurrencies compared to the impact of the Fed tightening monetary policy.

Figure 6

From a returns perspective, neither risky nor safe haven assets are thriving in current economic conditions. Gold remains the only asset class trading in the green year-to-date, but it trended lower last week following US stocks, bonds, and Bitcoin (Figure 6). As asset classes depreciate, we infer more inflows into the US dollar, increasing the likelihood that the US dollar index will remain above 102.

In addition, investors withdrew $13.7 billion from US stocks in panic, marking the second consecutive week of outflows. Ahead of the Federal Reserve's upcoming rate hike at its May meeting, $3.3 billion flowed into US fixed income securities (Figure 7). However, a stronger dollar could draw more money from international stocks and fixed income into US markets and commodities as returns denominated in a weak currency are unattractive.

Figure 7

Despite turmoil in traditional and crypto markets, with outflows from U.S. stocks and bonds, institutional capital outflows from cryptocurrencies have slowed. A total of $7.2 million in outflows were recorded last week, with Ethereum being the hardest hit, while altcoins rose overall (Figure 8).

Figure 8

For the altcoin season to fully take effect, Bitcoin must be in a stable state. Currently, the fierce sell-off across asset classes driven by strong US dollar demand has weakened Bitcoin in the short term.