Why Is Bitcoin Falling as the Dollar Crumbles?

Bitcoin, often seen as a refuge against the failures of traditional currencies, experiences a striking paradox. While the US dollar is crumbling at an unprecedented rate for the past 12 years, the queen of crypto stumbles. How can this drop be explained? Behind this contradiction lie obscure financial mechanisms, overlooked indicators, and a silent tug-of-war with central banks. Jamie Coutts, a seasoned analyst at Real Vision, sheds light on this high-stakes duel.

The invisible vise that strangles crypto

The MOVE index, a measure of the volatility of US government bonds, plays a key role in this equation. Seemingly stable, it displays a sneaky upward trend.

Why is this crucial? US Treasury bonds serve as universal collateral. Their instability forces institutions to reduce their exposures, drying up liquidity. The result: a tighter market, less conducive to risky assets like bitcoin.

When US Treasury bonds tremble, lenders apply haircuts on these collateral assets.

Coutts compares this to a domino: each adjustment reverberates across credits, investments, and ultimately, trust. Bitcoin, despite its theoretical safe haven status, bears the repercussions. Institutional investors, caught by the throat, prefer to liquidate their positions rather than navigate murky waters.

If volatility surges, central banks might intervene. But their tools are limited. A rate hike would worsen the liquidity crisis; a decrease would fuel inflation. Bitcoin, trapped in this game of cat and mouse, becomes a speculative bet… even against a vulnerable dollar.

Yet, another indicator sheds light on this unexpected drop: the spreads of corporate bonds, a mirror of market fears.

The ghost signal that spooks bitcoin

For the past three weeks, the spreads of corporate bonds — the gap between their yields and those of US Treasury bonds — are widening.

An historical signal: every time this phenomenon occurred, bitcoin reached a peak before a drop. Coutts sees this as a worrying pattern. Investors anticipate a risk of default, fleeing to safety… and neglecting uncorrelated assets.

The market often operates through mimetic behavior. When institutional funds reduce their exposure to corporate credit, hedge funds follow, then retail investors.

Bitcoin, a collateral victim, is perceived as a “last resort” asset that is too volatile. A vicious cycle forms: less liquidity → fewer buyers → price drop → selling panic.

The plummet of the DXY (dollar index) should have boosted bitcoin. But in 2024, the rules have changed. Spot ETFs, miners, and accumulation strategies (like that of Michael Saylor) create structural demand. Yet, that is not enough. Why? Because major players, anticipating a credit crash, prioritize cash… even in weak dollars.