Lesson 14

Yibo Crypto Host shares valuable knowledge—keep it for future reference

Dollar rises and falls, so why do cryptocurrencies “dance”? Understand this article to avoid pitfalls

Open your cryptocurrency market app, and you might notice a strange phenomenon: sometimes when the dollar is stronger, the prices of Bitcoin, Ethereum, and other coins seem to weaken; conversely, when the dollar weakens, the crypto market might become lively and rally. What exactly is the relationship between the dollar and cryptocurrencies? Why do fluctuations in the dollar cause waves in the crypto market? Today, I’ll explain it in plain language.

First, let’s talk about their core relationship: the dollar is the world’s “hard currency.” Whether for international trade settlements or cross-border investments, everyone recognizes the dollar. Cryptocurrencies, on the other hand, are more like “high-risk investment assets.” Their prices fluctuate more than stocks or funds, mainly driven by speculative capital and risk-hedging needs. These two are probably “frenemies”: when the dollar strengthens, people prefer to convert their money into dollars to buy government bonds or deposit in banks for safety, so high-risk assets like cryptocurrencies become less popular, and prices tend to fall; when the dollar weakens, people worry about the dollar losing value and seek ways to preserve wealth, some funds flow into the crypto market, pushing coin prices up.

So, what determines the dollar’s rise and fall? First, it depends on the “mood” of the Federal Reserve. When the Fed raises interest rates, savings become more attractive, and global funds tend to flow into the US, causing the dollar to appreciate; if the Fed prints money (quantitative easing), more dollars enter the market, and the dollar depreciates. For example, in 2022, the Fed raised interest rates seven consecutive times, and the dollar index surged to 114. During the same period, Bitcoin dropped from $48,000 to $16,000, a painful decline; whereas in 2020, the Fed engaged in unlimited money printing, and the dollar index fell below 90, while Bitcoin reached $29,000 by year-end. Besides policies, US economic data are also crucial—if inflation (CPI), employment figures (non-farm payrolls), and GDP growth are strong, it indicates a robust US economy, making the dollar more attractive. Geopolitical events, like wars or trade tensions, also play a role—during such times, everyone seeks safe assets, and the dollar, as a “safe haven,” demand increases, causing its price to rise.

Next, how does dollar fluctuation specifically impact cryptocurrencies? When the dollar strengthens, money flows out of the crypto market into dollar assets, shrinking the “crypto wallet,” reducing liquidity, and making prices prone to decline. Additionally, higher interest rates increase borrowing costs; many traders leverage their crypto positions, and when costs rise, they become less willing to operate, directly reducing market activity. Even stablecoins pegged to the dollar (like USDT) may see reduced supply, further affecting crypto trading. Conversely, when the dollar weakens, people fear inflation and dollar devaluation, so they treat cryptocurrencies as “hedging tools,” especially Bitcoin, often called “digital gold.” Low interest rates also make borrowing to trade crypto cheaper, increasing market volume. Stablecoins may also be issued more, injecting more funds into the crypto market and pushing prices higher.

What signals should ordinary investors watch? Data-wise, the Fed’s interest rate decisions every 6-8 weeks, monthly inflation data (CPI), non-farm employment figures, and real-time dollar index (DXY) movements are key. For example, a 1% rise in the dollar index typically causes the top 50 cryptocurrencies’ market cap to drop by about 0.8%. Good non-farm data may lead to expectations of Fed rate hikes, which could pressure the crypto market. Market news also matters—Fed policy statements, global trade tariffs, geopolitical news, and market sentiment signals like a spike in the VIX (volatility index) often correlate with crypto declines. Large-scale issuance of stablecoins might also signal that funds are preparing to buy the dip.

Finally, here are some practical trading tips. First, monitor the dollar index to judge trends—if the dollar index shows a big monthly rally, it might signal a coming bear market in crypto, so be cautious. Second, control risk—when dollar volatility is high, avoid excessive leverage; consider hedging strategies, like selling crypto while buying dollar futures to reduce losses. Set phased stop-losses—if the dollar breaks key levels, sell part of your holdings to avoid heavy losses. Also, in extreme conditions, prioritize holding liquid mainstream coins rather than risking illiquid altcoins that are hard to sell.

In summary, the relationship between the dollar and cryptocurrencies is very close. Understanding the logic behind dollar movements, combined with market signals and risk management, can help you avoid detours in crypto trading. After all, investing involves risks—especially with highly volatile assets like cryptocurrencies. The more you understand the underlying logic, the more rational your decisions will be.