Strong US Dollar, Not ICOs, Drove Recent Cryptocurrency Market Decline

usd cryptocurrency correlation

The cryptocurrency markets experienced a slight pullback on Thursday but have more or less managed to maintain the midweek recovery that followed Monday’s massive sell-off.

As CCN reported, some analysts attributed that decline — which affected ethereum to a far greater extent than bitcoin — to ICO-funded startups cashing out their capital before the market takes an even further dip. Arthur Hayes, CEO of cryptocurrency derivatives exchange BitMEX, added that he believes nervous VCs will soon begin moving out of their ICO tokens and ether holdings, which he forecasts will ultimately drive the ethereum price below $100.

ethereum price chart
ETH/USD | Bitfinex

However, Mati Greenspan, senior market analyst at eToro, believes that this assessment misses the mark. Writing in market commentary made available to CCN, Greenspan argued that the crypto market’s movements this week have correlated with fluctuations among local currency values in emerging markets, which have been responding inversely to the strengthening of the US dollar.

This USD breakout caused the value of emerging markets currencies to plunge, and Greenspan says that there are signs — including spikes in blockchain activity — that suggest this pullback spilled over into cryptocurrencies. It’s true that investors in these markets often increase their cryptocurrency holdings when their local currencies weaken, but — for all its alleged faults — the dollar is still the reserve currency of choice for most investors worldwide.

USD price
USD Index | Source: eToro

“As the United States moves to tighten its economy and avoid strong inflation, they’re taking action that is strengthening the Dollar. Because the US Dollar is the global reserve currency, many smaller economies rely heavily on a stable exchange rate with the greenback,” Greenspan wrote. “So too, as the Dollar is being seen as a stable store of value at the moment, there really isn’t much incentive for people to store their money in digital assets.”

“Over the course of this week, it seems that cryptocurrencies have been reacting negatively to the surging US Dollar. In this sense, they’ve been acting a lot like traditional commodities,” he added in an emailed statement to CCN. “Usually, when the Dollar goes up assets like gold and oil go down in relation. Over the last week both digital gold and real gold have fallen sharply in the face of the rapidly rising Dollar.”

USD has pulled back somewhat against emerging markets currencies. | Source: eToro

However, the dollar rally has hit a speed speed bump over the past several days, enabling currencies like the Lira, Rand, and Peso to recoup some of their losses.

That USD pullback, perhaps not coincidentally, coincided with a midweek crypto-renaissance, enabling the cryptocurrency market cap to add nearly $20 billion after briefly dipping below $190 billion on Monday.

So why is bitcoin standing out from the pack, even as the overall market struggles against a stronger dollar? It may be, to borrow a phrase from Fundstrat founder Tom Lee, because “bitcoin is the best house in a tough neighborhood.”

Featured Image from Shutterstock

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Author: Josiah Wilmoth

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