As has been widely documented, the U.S. dollar is likely to wrap up 2022 as one of the best-performing major currencies, thanks to the Federal Reserve’s six interest rate hikes for the extended run of greenback bullishness.
Predictably, the strong dollar is sapping strength from some other asset classes with the “risk” label. It’s punitive for multi-national companies that generate significant amounts of their revenue overseas. Likewise, the strong dollar has been a drag on bitcoin and other digital assets, explaining why exchange traded funds such as the VanEck Digital Assets Mining ETF (DAM) and the VanEck Digital Transformation ETF (DAPP) are scuffling this year.
However, that scenario could change for the better if the Federal Reserve slows its pace of rate hikes or lays off that gas pedal altogether next year. Importantly, signs are already emerging that bitcoin’s correlations to the U.S. currency are waning.
“The correlation of bitcoin (BTC) and ether (ETH) to the U.S. Dollar Index (DXY) has once again turned negative. BTC’s correlation coefficient to the DXY has fallen to -0.36, after moving as high as 0.84 on Nov. 19,” reported Glenn Williams for CoinDesk. “BTC had held a persistently inverse relationship to the DXY since July, before crossing into positive territory on Nov 9. In August, the correlation between the two assets fell to -0.94.”
DAM and DAPP are both equity-based ETFs, but given the compositions of each fund, both are correlated to bitcoin prices. Another way of looking at that scenario is that positive catalysts for the largest digital currency often turn positive for crypto-correlated assets, including DAM and DAPP.
Perhaps adding to the allure of ETFs such as DAM and DAPP over the near term, particularly with valuations on member firms low, is the point that bitcoin volatility is declining. That’s despite the obvious headwind presented by the collapse of FTX and the ensuing contagion effect.
“Bitcoin has resumed its bout of range-bound trading, albeit near $16,500 as opposed to $19,500. The 15% haircut represents the discount applied to asset prices following questions about FTX and related contagion. Volatility, as measured by the Average True Range (ATR), has declined 40% over the most recent two weeks, as markets have begun to calm,” according to CoinDesk.
For its part, DAPP is showing some signs of life, gaining almost 5% over the past week. The ETF, which follows the MVIS Global Digital Assets Equity Index, holds crypto-correlated stocks such as Block (NYSE:SQ) and Coinbase Global (NASDAQ:COIN), among others.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.