CoinDesk Spotlights Zerocap | Bitcoin-Dollar Correlation Shaken Ahead of U.S. Election

Read more in a recent article in CoinDesk.

21 October, 2024: As the U.S. presidential election on November 5 approaches, financial markets are shifting rapidly, with traders positioning themselves for potential swings in both cryptocurrencies and fiat currencies. Historically, Bitcoin (BTC) has shown a negative correlation with the dollar index (DXY), meaning when the dollar strengthens, Bitcoin tends to weaken, and vice versa. However, this pattern may face disruption during the election season as the markets respond to geopolitical uncertainty and changing sentiment around the candidates.

Recent data from options markets reveal a bullish sentiment for both Bitcoin and the dollar index, suggesting the inverse relationship between the two assets could weaken, at least in the near term.

BTC Options Signal Bullish Momentum Despite Strong Dollar

Bitcoin options on the Chicago Mercantile Exchange (CME) show a growing bias toward bullish positions, even as the dollar index holds firm above 103.00, supported by expectations of ongoing strength in the U.S. currency. At the moment, one-month BTC 25-delta risk reversals—which measure the difference in premiums between call and put options—stand at 1.20. This indicates a notable preference for call options, a bullish signal, in the next four weeks.

Typically, call options signal that traders expect an increase in BTC’s price, while put options reflect concerns over potential downside. Interestingly, this optimistic sentiment toward BTC persists even as the dollar index consolidates recent gains, defying the usual negative correlation between these two assets.

As Zerocap’s Chief Investment Officer, Jonathan de Wet, explains:

“The upside convexity on a Trump win is worth being long, and we are seeing market participants building positions in the lead-up. In the absence of an escalating crisis, we see BTCUSD at 70,000 in the coming weeks, continuing off current downside support, with equities breaking further highs.”

Bitcoin Investors Look Beyond Dollar Trends

While Bitcoin traditionally reacts negatively to a stronger dollar, recent market movements suggest a shift in behaviour. Bitcoin has surged to nearly $68,000, its highest since July 29, even as the DXY maintains strength. This divergence indicates that traders are now factoring in other catalysts—such as the outcome of the U.S. election—to a greater degree than they are considering currency fluctuations.

The presidential election on November 5 and its aftermath are critical factors. The possibility of Donald Trump securing a second term is viewed favourably by many crypto investors, given his pro-crypto policies and statements in favour of digital assets. This has led to increased demand for Bitcoin call options at strike prices of $80,000 and even $100,000, reflecting expectations of significant upside potential in the near term.

Options Data Hints at Continued Dollar Strength

While Bitcoin investors remain optimistic, the foreign exchange (FX) market suggests continued strength for the dollar. The euro-dollar (EUR/USD) options market displays a negative risk reversal of -0.39, pointing to ongoing concerns about euro weakness and dollar strength. This trend may pose a challenge for Bitcoin’s rally, as a stronger dollar typically exerts downward pressure on risk assets.

Nonetheless, traders remain undeterred. As the election narrative gains prominence, they continue to build long positions in BTC, banking on Trump’s policies to unlock further growth in the crypto space. Deribit’s BTC options contracts—set to expire shortly after the election—also show positive risk reversals, reinforcing the bullish sentiment toward Bitcoin during this critical period.

Trump vs. Harris: A Pivotal Election for Crypto Markets

The differing policy outlooks of the two candidates have fueled uncertainty in the markets. While Donald Trump’s support for crypto regulation and enthusiasm for blockchain technologies have been well-publicised, Kamala Harris’s stance on digital assets remains unclear. This contrast in policy perspectives has made the election a defining narrative in crypto markets over the past six months.

According to a report from FRNT Financial:

“The U.S. election has emerged as a relatively dominant narrative for crypto over the past six months. Donald Trump’s embrace of the space has been broad, including concrete policy proposals. On the other hand, the nature of crypto policy under a Kamala Harris administration has been unclear.”

Given the stakes, market participants are betting on BTC as a hedge against political uncertainty, with many expecting favourable regulatory developments should Trump win the election.

What Lies Ahead for Bitcoin and the Dollar?

The next few weeks promise to be pivotal for both Bitcoin and traditional financial markets. A stronger dollar could traditionally hinder Bitcoin’s rally, but options data suggests that traders are focusing more on the election outcome than on currency dynamics.

Jonathan de Wet of Zerocap remains optimistic about Bitcoin’s potential to surge:

“We see BTCUSD at 70,000 in the coming weeks, continuing off current downside support, with equities breaking further highs.”

The sustained demand for high-value call options at $80,000 and $100,000 indicates that traders are prepared for a significant price movement. Whether Bitcoin’s rally will coincide with further dollar strength—or if a Trump win will be the key trigger—remains to be seen.

Final Thoughts

The traditional inverse relationship between Bitcoin and the dollar index may not hold in the run-up to the U.S. election. With traders betting on both Bitcoin and the dollar for gains, the market appears to be pricing in a unique scenario where both assets could rally simultaneously. As options activity intensifies, the stakes for crypto markets are higher than ever. Whether Bitcoin reaches new highs or the dollar asserts dominance will largely depend on the outcome of the election and subsequent market sentiment.

Disclaimer

This article includes a summary of content originally published in CoinDesk. and our 14th October Edition Weekly Wrap. The information is intended for informational purposes only. Zerocap does not endorse or approve any specific content or viewpoints contained in the original articles.

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