The US dollar remains the world’s most seminal and iconic international currency, and one that features on one side of around 88% of all global forex transactions.
Not only is the US dollar the most widely traded and crucial from an historical perspective, but it’s also the world’s largest foreign reserve currency and remains the peg for a large number of currencies throughout the developing world.
Unsurprisingly, the movement of the USD also has a direct impact on the viability of cryptocurrencies. But how does this relationship work, and does the greenback actually control the crypto market?
The Relationship Between the USD and Cryptocurrencies in Action
We see regular examples of the relationship between the greenback and the crypto market, and more specifically on how the former impacts prices in the latter.
Recently, the Ethereum token extended its gains beyond its previous $4,600 level, after the Federal Reserve in the US announced a tapering of its asset purchases.
The latter represents a tripling down on rising inflation, which represents a transority bet that may ultimately prove to be mistaken and potentially trigger massive inflows for in-demand assets like Ethereum and Bitcoin.
So, although the most recent Oanda trading analysis revealed that Bitcoin remained in a consolidation pattern for now, the implementation of this policy could support a bullish case for Bitcoin in the longer-term.
Clearly, key policy measures and decisions that impact fiat currencies and their long-term value have a direct influence on the price and demand of crypto assets, particularly high profile and in-demand tokens such as Bitcoin and Ethereum.
Why is Crypto So Volatile?
Of course, this influence doesn’t explain the full volatility of crypto prices, with assets like Bitcoin experiencing considerable volatility through 2020 and the first half of this year.
More specifically, a single BTC token was valued at just $18,441.23 on November 21st last year, before increasing more than three-fold to peak at $63,569.81 on April 14th. However, it had subsequently plunged to 29,789.94 by July 21st, before climbing once again to $58,684.50 on November 21st of this year.
While this highlights the asset’s long-term growth, it also showcases incredible volatility, which is influenced and underpinned by far more than US dollar movements.
For example, cryptocurrencies still represent an emerging market, and one that provides a viable alternative to more developed and established assets. However, this lack of maturity also leads to volatile price movements, which can also be challenging for investors over time.
Because of this, the crypto market is also highly unpredictable and speculative, which can in turn cause a sudden influx of money or sudden withdrawal from the market.
This is also indicative of a market that lacks tangible or corporeal value, creating a scenario where prices are determined almost entirely by the underlying laws of supply and demand.