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What the US Dollar Weakness Means for Bitcoin - 360 Degrees Markets Ltd (
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09th Nov 2020

What the US Dollar Weakness Means for Bitcoin

Article Table of Contents:

The US dollar began 2020 on quite a strong note. In March 2020, the world’s reserve currency achieved a three and a half year high. But things began to change since that point, largely because of the spread of the Covid-19 pandemic. By July, the US dollar’s trade weighted index, which measures its value in respect to other currencies, had fallen to its lowest levels since May 2018. In fact, July was the worst month for the greenback in over a decade.  

The Tumbling Dollar

The main reason for the weakening dollar has been the nation’s weak response to the coronavirus pandemic. As of November 2020, the United States has the highest number of cases in the world. Also, the restrictions do not seem strong enough to flatten the curve in the country. There has been great uncertainty regarding a stimulus package as well. This has led to the weakening of the economy. 

The US dollar has also weakened due to the rising trade deficits. Additionally, the case of US interest rates remaining low for the near future has not made matters any better. 

The Impact on Bitcoin

In the early part of March 2020, the US dollar experienced a sudden increase in demand. This coincided with the value of Bitcoin dropping by almost 50% to $3,700. However, as the US Dollar Index (DXY) started to weaken, with the market crash, other “safe haven” assets began to gain in value. Between March and September, gold experienced a 31% increase in value and the price of Bitcoin rose 185%. During this period, BTC soared to over $12,000, after having struggled to break out of the $9,000 to $10,000 range for some time. 

The US dollar experienced some relief in September, as we saw the construction of a bottom. This also saw a slight drop in Bitcoin prices. The movements of Bitcoin and the US dollar point towards an inverse relation between the two currencies. This is because Bitcoin is generally priced by traders against the USD. So, when the value of the US dollar drops, the asset that is being traded against Bitcoin also depreciates in value. This increases the chances of Bitcoin rising in value. 

The Historical Trend

To gain a better idea of the impact of a weakening dollar on Bitcoin, let’s look at some examples from the past. Bitcoin touched its previous cycle of highs between 2014 and 2017. In 2017, the US dollar showed significant weakness, with the EUR/USD pair rallying from 1.03 to 1.25. It was during this period of instability and uncertainty of the US dollar that Bitcoin saw an incredible rise from a mere $1,000 to a whopping $20,000.  

Another comparable case can be seen when the bubble burst. Although there were no cryptocurrencies at the time, the impact on gold can give us an idea. After the bubble popped in 2000, gold prices corrected 30%. 

The historical trends as well as the nature of Bitcoin point towards BTC becoming stronger as the US dollar weakens. But, like all other cryptos, Bitcoin is highly volatile. So, if you are thinking of taking a position, be sure to use the right technical tools and conduct adequate research for an informed trading decision.