Of the dozen indicators and metrics we have researched, the fortunes of the US Trade-Weighted U.S Dollar Index (TWDI) has the biggest impact on Bitcoin USD prices. When the TWDI depreciates, this boosts Bitcoin prices strongly. When the TWDI becomes stronger, Bitcoin prices face significant headwinds.
The TWDI is a weekly index created by the U.S Federal Reserve to measure value of the U.S. dollar, based on its competitiveness versus U.S trading partners. The index gives importance to currencies most widely used in international trade, rather than comparing the value of the U.S. dollar to all foreign currencies.
The 48-week percentage change in the TWDI is inversely correlated to the 48-week percentage change of Bitcoin priced in Dollars, with a correlation with r-square of 0.57:
The regression chart above shows that as the TWDI depreciates over a 48-week period, (Dollar becoming weaker) then the trend is for Bitcoin priced in Dollars to rise strongly over the same 48 weeks. When the TWDI appreciates (Dollar becoming stronger) then the trend is for Bitcoin priced in Dollars to rise much more slowly over 48 weeks.
Interestingly, periods of negative BTC-USD growth over 48-week periods are not only uncommon, but also relatively mild. Additionally, 48-week losses in Bitcoin have only ever been accompanied by a strengthening Dollar. When the Dollar is weakening, Bitcoin has never experienced negative 48-week growth.
This inverse relationship makes a lot of sense for three reasons.
- First, Bitcoin is priced in USD and if USD depreciates, it makes sense that more dollars are required to purchase the Bitcoin.
- Conversely if USD appreciates, less dollars are required to purchase 1 Bitcoin and the Bitcoin price should thus fall.
- Secondly, the main reason people invest in Bitcoin is as a store of wealth, to protect against a depreciating Dollar, so if the dollar depreciates it makes sense more people want to own Bitcoin and if the Dollar is in a cycle of appreciation (becoming stronger) then there is less compelling reason to own Bitcoin.
Using the above regression we can use the current 48-week change in the TWDI to derive implied 48-week changes in Bitcoin:
We can then take the Bitcoin price observed 48 weeks ago and increase it by the implied 48-week change (from green line above) to impute an implied current price for Bitcoin:
Remarkably, the correlation between the current Bitcoin price (blue line) and the TWDI implied Bitcoin price (green line) is 0.89. The difference between the two is obviously an indication of how overvalued or undervalued Bitcoin currently is, which forms the basis for our upside/downside forecast.
As of 6 Aug we can see that the current Bitcoin price was $42,828 and the implied price was $42,539 meaning that Bitcoin is almost exactly fairly priced according to the current levels implied by the Trade Weighted US Dollar Index.
The above charts are updated every Tuesday for our subscribers, as part of the Bitcoin Institutional Advisory package bundled into our standard subscription.
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