Bitcoin's Inverse Relationship to the US Dollar Is Breaking Down

Despite the dollar’s 2016 gains and year-end rate hike, Bitcoin still outpaced the global reserve currency in 2016 in price terms. Bitcoin’s “inverse relationship to the Dollar” seemingly no longer persists.

Also Read: Here Are Bitcoin’s 8 Fastest Growing Markets

The Only Fed Rate Bitcoin Has Ever Known

Record low interest rates between December 2008 and December 2016 created unprecedented economic conditions globally – in fact, the only economic conditions the cryptocurrency Bitcoin, which was released January 2009, had ever known.

“Since its inception,” itBit writes in an August 2015 report when the federal funds rate remained at a record low 0.25%, “Bitcoin has existed in a zero interest rate environment. This may soon change as the Federal Reserve appears close to raising interest rates…”

When the Federal Reserve finally increased its benchmark interest rates December 14, just the second time in ten years, the quasi-public institution signaled a strengthening economy. Central bank officials increased the federal-funds rate by a quarter percentage point, to between 0.50% and 0.75%, citing in particularly an improving labor and employment market, as well as a rate of inflation which was moving towards target levels.

Throughout 2016, the perception of Bitcoin as a ‘new safe-haven’ persisted. Thought around the cryptocurrency had held that, if the Federal Reserve hiked interest rates, bitcoin’s perceived use as protection against economic uncertainty may be diminished. Its price may then fall.

But, despite the dollar’s 2016 gains and year-end rate hike, Bitcoin still outpaced the global reserve currency in 2016 in price terms. Bitcoin’s “inverse relationship to the Dollar”, as itBit discussed in its 2015 report, seemingly no longer persists.

The first, tiny bump in the Bitcoin chart above represents the 2011 dip in the USD chart below. Correlations become rougher over time. For instance, the US Dollar, during bitcoin’s price increase to its all-time high, traded sideways. In the present day, each is in bull cycles.

Emerging Markets Go Bitcoin

In his December 27 post, South Africa Shark Tank shark and Bitcoin investor Vinny Lingham discussed the reasons he believed Bitcoin had increased so dramatically throughout 2016. He cited the recent fed interest rate hike as one.

“…[M]ost misunderstood and not often cited – the recent fed rate hike which puts pressure on emerging market currencies, strengthens the dollar and in turn creates a surge in the forex/BTC trading price,” Mr. Lingham, who is known for cogent Bitcoin predictions, writes. “This in turn creates additional foreign buying and demand for Bitcoin as a forex hedge, particularly outside the US, because the price of Bitcoin in that country is rising quickly.”

Mr. Lingham argues that when the US dollar surges, currencies in emerging markets are devalued, increasing demand for, and the price of, bitcoin. Markets such as Venezuela, Indonesia, Colombia, Malaysia are currently among the fastest growing markets for Bitcoin.

“…Essentially, the higher the rates go, the higher the demand for Bitcoin will be,” he writes of emerging markets.

2017 Fed Rate Outlook

When the Fed raises rates next depends on its economic outlook for 2017. Fed officials do expect to raise rates next year by another 0.75 percentage points, possibly in three-quarter point nudges upwards.

This could then indeed lead to a further increase in the value of the dollar, a devaluation of emerging market currencies, and increased Bitcoin demand in affected emerging markets.

What do you think might happen with the Federal Reserve funds rate and Bitcoin in 2017? Let us know in the comments!

Images: Shutterstock, Blockchain.info & MacroTrends