High inflation and intense interest rate hikes have crushed the price of bitcoin this year

It’s been a long, dark crypto winter for bitcoin, with the price of the world’s largest crypto-currency falling nearly 60 percent this year. High inflation, which has led to aggressive interest rate hikes by the Federal Reserve, has largely led to crypto-currencies performing like tech stocks, which are not doing well in the face of rising interest rates.

With more rate hikes expected, many are now wondering when the crypto-currency winter will end. While it is difficult to predict the future in the short term, there is one event that could allow bitcoin to escape these tough times.

An extremely strong U.S. dollar

Aside from rising interest rates, one event that has apparently impacted the crypto-currency market is the surge in the U.S. dollar, which has reached a 20-year high. The Dollar Index, which tracks the U.S. dollar against other currencies, has risen nearly 18.5 percent this year. The dollar briefly overtook the euro and also moved closer to the British pound.

Not only have rising interest rates contributed to the strength of the dollar, but the U.S. dollar is also the world’s reserve currency, and right now the world is in trouble after Russia’s invasion of Ukraine, which has caused disruptions in the energy market. This has led to more difficulties in Europe and the UK, and has significantly damaged the economic outlook for the region.

While the U.S. economy could be headed for a severe recession, most economists consider its prospects to be better than those in other parts of the world at this time. All of this has led investors and other stakeholders to turn to the dollar in a flight to safety.

But a strengthening dollar has historically not been good for bitcoin, which tends to trade inversely to the dollar. If you think about the origins of bitcoin, this makes some sense. Bitcoin was founded in the aftermath of the Great Recession, when people had little faith in the traditional financial system, which at the time had just played a major role in the economic downturn.

The goal was to create an alternative currency and financial system outside of government control, which reduced the risk of manipulation. So if there’s a lot of faith in the dollar, there’s probably less faith in crypto.

How the U.S. dollar could help Bitcoin

If a surge in the U.S. dollar hurts bitcoin, then a decline in the U.S. dollar would likely help the world’s largest crypto-currency. In general, the strength of the dollar has had a strong correlation with the Fed’s benchmark overnight lending rate, the federal funds rate.

While Fed members still expect to have to continue raising rates later this year, a decent number of investors believe the Fed will have to pivot sooner than the market thinks, as the economy heads into a more severe recession that won’t allow the Fed to be as restrictive with its policy.

However, even if that happens, the dollar could remain strong if it continues to be a safe haven for investors while other European economies are struggling. So keep an eye on geopolitical events such as Russia’s occupation of Ukraine and the resulting energy crisis abroad. So keep an eye on geopolitical events such as Russia’s occupation of Ukraine and the resulting energy crisis abroad.