Bitcoin's sharp fall from $50K linked to stronger US dollar, gold correlation shows

Bitcoin (BTC) and spot gold (XAU) hovered below their key psychological levels on Sept. 8, as a stronger United States (USD) dollar weighed on investors' appetite for hedging assets.

The BTC/USD exchange rate dropped 5.27% to its intraday low of $44,423 but recovered a portion of those losses after reclaiming the $45,000-46,000 range as support. The pair's recovery also came as an extension to its ongoing rebound from $42,830, a level it reached on Tuesday after falling by more than 18% in the session.

Bitcoin's massive sell-off coincided with a strikingly similar but dwarfed decline in the rivaling gold market. In detail, the precious metal suffered its worst daily drop in a month on Sept. 7 as spot XAU/USD rates fell below $1,800 following a minus 1.37% intraday move.

The large red hourly candle on gold and Bitcoin charts appeared between 10:00 and 11:00 UTC. However, the precious metal consolidated sideways after the big decline in contrast to Bitcoin that extended its downtrend.

In detail, the cryptocurrency crumbled under the weight of excessively leveraged bullish bets. ByBt data showed that about $3.68 billion worth of longs in the Bitcoin options market got liquidated in the last 24 hours, marking it the largest liquidation since June.

Automated liquidations caused additional selloffs in the Bitcoin market as traders were forced to sell their BTC holdings to cover their margin calls.

Is the US dollar responsible for the big drop?

Worth noting, the sudden drop in Bitcoin and gold prices coincided with a sharp spike in the U.S. dollar index (DXY).

The index, which measures the dollar's strength against a basket of top national currencies, rose by 0.41% to 92.53 on Tuesday and continued climbing in the ongoing session to settle its intraday high at 92.73.

DXY moved away from its one-month low, benefiting from the rising U.S. Treasury yields ahead of the government debt sale this week, including $58 billion in three-year notes, $38 billion in 10-year notes, and $24 billion in 30-year bonds.

The yield on the benchmark US 10-year Treasury note yield, which was around 1.32% after Friday's weak nonfarm payroll report, rose to 1.377% on Tuesday. At press time, it stands at 1.351%.

Mixed outlook until Fed meeting

Rising yields typically compete for haven flows against Bitcoin and gold. But despite the latest climb, they remain below July's 5.4% core inflation, thus posing non-yielding safe-havens as more attractive bets against rising consumer prices.

But with the Federal Reserve planning to start winding down its $120 billion a month asset purchasing facility at the end of this year, some analysts believe that bond yields would keep on recovering. In turn, they would provide the dollar a bullish backstop.

Shaun Osborne, chief FX strategist at Scotiabank in Toronto, told CNBC:

"The Federal Reserve we think is still likely to move toward tapering by the end of this year, the U.S. economy is likely to perform relatively strongly, so our view is minor dollar dips, minor dollar weakness is probably a buying opportunity."

Related: Bitcoin price to hit $100K in 2021 or early 2022: Standard Chartered

On the other hand, the rising delta variant of the Covid-19 threatens to dampen recovery prospects. In turn, it would force the Fed to sustain their expensive bond-buying program, thus keeping a lid on the yields and the dollar alike.

As a result, the outlook for Bitcoin and gold looks mixed. The Federal Open Market Committee's meeting later this month expects to shed more light on the taper timeline.

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