When the US dollar rises and falls, why do cryptocurrencies seem to "dance"? Understand this article to avoid pitfalls

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

First, let’s talk about the core relationship: the US 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 wildly than stocks or funds, mainly driven by speculative capital and safe-haven demand. 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, making high-risk assets like cryptocurrencies less attractive, 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, the interest on savings increases, attracting global funds to the US, causing the dollar to appreciate; if the Fed prints money (quantitative easing), more dollars flood the market, leading to dollar depreciation. For example, in 2022, the Fed raised interest rates seven times in a row, and the dollar index surged to 114. During the same period, Bitcoin dropped from $48,000 to $16,000, a tragic decline; whereas in 2020, when the Fed engaged in unlimited money printing, the dollar index fell below 90, and Bitcoin rose to $29,000 by year-end. Besides policy, US economic data are also crucial—good inflation rates (CPI), employment figures (non-farm payrolls), GDP growth—indicate a strong US economy, making the dollar more attractive. Geopolitical events like wars and trade frictions 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 exactly does dollar fluctuation influence cryptocurrencies? When the dollar strengthens, funds tend to flow 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 hesitant to operate, decreasing market activity. Even stablecoins pegged to the dollar (like USDT) may see reduced supply, further impacting crypto trading. Conversely, when the dollar weakens, people fear inflation and dollar devaluation, so they turn to cryptocurrencies as a "hedge," especially Bitcoin, often called "digital gold." Low interest rate environments also make borrowing to trade cheaper, increasing market volume. Stablecoins may also be issued more, injecting more funds into the crypto market and pushing prices higher.

For ordinary investors, what signals should they watch? Data-wise, the Fed’s interest rate decisions every 6-8 weeks, monthly inflation data (CPI), non-farm employment reports, 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 the VIX spike often coincide with crypto declines. Large-scale stablecoin issuance might also be a sign that funds are preparing to buy the dip.

Finally, here are some practical trading tips. First, monitor the dollar index to judge trends; for instance, a significant monthly rally in the dollar index could signal an upcoming crypto bear market, so be cautious. Second, control risk—when dollar volatility is high, avoid excessive leverage, and consider hedging strategies, such as selling crypto while buying dollar futures to reduce losses. Set staged stop-loss levels—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 closely linked. 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.