After 6 months of consolidation, Bitcoin has finally broken through its all-time high.
This breakthrough comes as no surprise to our readers.
We called Bitcoin undervalued at $60,000, and our clients at Bravos Research have benefited from exposure to Bitcoin and other cryptocurrencies throughout this upward movement.
Now the question is: Can Bitcoin sustain this rally or are we nearing the peak before a painful pullback?
To answer this, we have to first take a look at the U.S. dollar index – DXY.
DXY has risen by over 5% in less than 15 trading days.
The last few similar dollar surges occurred in:
- August 2023
- September, June, and April 2022
- March 2020
Each instance coincided with at least a 20% decline in Bitcoin’s price.
Throughout Bitcoin’s history, it has held a negative correlation to the U.S. dollar index.
So, when the dollar weakens, Bitcoin often thrives.
But when the dollar strengthens, Bitcoin sees large drawdowns.
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The Trump Exception
November 2016 provides an interesting exception to the inverse relationship between dollar-Bitcoin.
When Trump won the presidency, the dollar spiked, yet Bitcoin continued climbing.
The following year saw a spectacular Bitcoin bull market during Trump’s mandate.
But why does the dollar-Bitcoin inverse relationship exist in the first place?
Most exchanges price Bitcoin in USD. Let’s say Bitcoin trades at $60,000 with the dollar at 1:1 with the euro.
Any 10% dollar weakening makes Bitcoin 10% cheaper for European buyers.
This price differential can spark significant foreign buying interest.
Conversely, dollar strength makes Bitcoin more expensive.
Right now, Bitcoin’s rise in euros and Canadian dollars exceeds its U.S. dollar gains, potentially encouraging foreign sellers.
The Stock Market Factor
Despite the recent dollar strength, Bitcoin has rallied aggressively.
Could this be another case where Bitcoin defies expectations and continues higher?
The S&P 500’s significant 6-month run-up provides an important perspective.
Historically, strong U.S. stock markets correlate with strong Bitcoin performance.
The S&P 500, representing the broader US economy, could be a key driver for crypto’s resilience.
This is similar to Bitcoin’s 2016 performance when market optimism about a business-friendly president drove both stocks and Bitcoin higher.
Our Valuation Model
So which will dominate now: the dollar’s strength pulling Bitcoin lower, or the stock market’s momentum driving it higher?
Our proprietary Bitcoin valuation model, incorporating both dollar and the S&P 500.
It suggests that Bitcoin still remains undervalued.
As of early Nov, it showed Bitcoin’s fair value to be about 100% higher than its trading price.
We’ll release an updated version of this model in early December.
Recent price action shows Bitcoin testing key resistance levels.
While we’ve booked partial profits, the technical structure remains promising.
A massive head and shoulders bottoming pattern, broken in February 2024, suggests a potential target of around $150,000.
While this isn’t a prediction, it’s a potential scenario that we’re closely monitoring.
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