Following the email I sent last week to my readers on the Bitcoin price, I did some more research over the weekend and saw something in the Euro price and Dollar Index.
What I see going on in these two price charts might hold some clues as to the direction of Bitcoin over the coming weeks and months.
The US Dollar is the most widely known currency in the world. It’s also the most traded currency. Much of that is down to the fact the Crude Oil and most other commodities are priced in US Dollars.
So when you see the price of oil falling or rising in any given day, it is the price quoted in US Dollars that is changing.
I don’t want to get too complicated but when we say the US Dollar is strong, we need should give some context. By strong what do we actually mean? Strong compared to this time last week, month or last year or is it something else?
The truth is when investors buy US Dollars they are exchanging something to own those USD. For oil producing countries, it is the oil that is being exchanged for Dollars. For international investors who want to invest in US companies they might be holding Euros and who want to sell their Euros and buy USD to then invest in the US.
This raises the key point of this post. When we look at the price of Bitcoin, we see it priced in USD. When the price of Bitcoin falls it means that investors would rather own USD than Bitcoin. But it may well be Euro instead. So investors are really making a choice between where they wish to put their money. If’s it Euro, they may have to sell US Dollars to own Euros or if its US Dollars they might have to sell their Euros or Japanese Yen or Canadian Dollars or Bitcoins.
There are many reasons what drives investor’s decisions and where they put their money which I won’t go into here. Instead, I want to show you how all this translate in price and profiting from these changes of allocation of money.
Below is a the price chart of the US Dollar Index. This is a very actively traded index, which is basically a number for the current value of the US Dollar. That number is derived from looking at the value of a collection of other currencies.
Each of those other currencies contributes to the index in varying amounts. For example, the Euro makes up nearly 58% of the index while the Japanese Yen makes up just under 14% of the index. So in other words, the Euro has a much greater influence on the price of the US Dollar index than any of the other currencies.
Remember that investors are buying or selling Euros in exchange for US Dollars – there is an inverse relationship between the two prices.
So when the Euro falls in value, the US Dollar will increase in value and the same can be said when the Euro increases in value.
Why does this matter?
As you can see on the chart above which the price movements of the US Dollar since April 2016. For the whole of 2017 and the first half of 2018, the US Dollar has been declining. The has meant that other currencies, primarily, the Euro have been increasing.
The chart below should demonstrated this. During 2017 the Euro increased in value then for the first half of 2018 it really didn’t make much movement either way.
Then in May 2018 the US Dollar broke through its trend down (I’ve marked that above with a a circle on top of line marking this trend).
The corresponding chart for the Euro shows price falling since just before May and breakdown further in the area circled.
The crunch time for Euro was last week. The horizontal line marked the point where Euro buyers would be interested in buying the currency (and selling other currencies, potentially, US Dollar).
However, instead of buyers being able to support price where they had previously done so, Euro sells (US Dollar buyers) have pushed priced down through previous support to the lowest levels for over a year.
Much of the selling could be investors looking to buy US Dollar to avoid the economic crisis in Turkey however the point is, a major area of demand for demand for Euros in no longer there.
So how does this impact on Bitcoin?
The Bitcoin chart below shows a circle which corresponds to the price of the US Dollar Index breaking up through its trendline. Bitcoin was impacted to extend by this.
Investors sold Bitcoin, Euros (as well as the other currencies) and bought US Dollars.
However, where there’s a disconnect and where there might be a clue for Bitcoin’s future direction is last week.
The chart below which I’ve marked with a (badly) drawn curve following price. The initial falls at the start of 2018 where pretty steep and caught the headlines.
However, each new price low since 2017 has been shallower. Then last week when the Euro broke down and US Dollar increased further, Bitcoin has done nothing… Going on the May price action we could assume, Euro sellers would also be Bitcoin sellers. Instead, price has been stable… So far. the general strength of the US Dollar is not hampering Bitcoin.
Therefore, is the market telling us it no longer wants to sell Bitcoin? It had the opportunity last week but didn’t. Does that mean, long term investors see the $6000 – $6500 area (as I highlighted in last week’s email) as one the despite everything else going on in the world, they want to buy at?
It’s still too early to make conclusions, however, the signposts are suggesting Bitcoin has reached its bottom after the December 2017 peak. We still need a couple of more weeks to make any firm decisions, so let’s see how price gets on over the coming days.
Disclose: I don’t own any Bitcoin at the time of writing.