Trading Bitcoin can be tricky — Here’s 3 key macroeconomic indicators worth following

When to buy and when to sell Bitcoin is a decision that continues to perplex investors to this day. A widening range of factors impact (BTC) price, and developing a methodology for consistently avoiding losses and generating a profit is essential for such a high-volatility asset.  

Recently, Bitcoin analyst and Cane Island Digital founder Timothy Peterson shared a cheat sheet encompassing 8 macroeconomic factors that impact Bitcoin price. Let’s take a look at the top 3 metrics to understand how they correlate with Bitcoin price and offer insight into optimal buying and selling opportunities.

US Dollar Index (DXY)

The DXY measures the US dollar value against a basket of major currencies. It is influenced by, among others, interest rates, geopolitics, domestic economic conditions, and foreign exchange reserves held in USD.

A stronger DXY tends to negatively impact Bitcoin's price. Conversely, when confidence in the index wanes, investors turn to risk assets, equities and Bitcoin. This inverse correlation has been observed for years and continued through 2024, as shown in the recent NYDIG research.

Since September 2024, the DXY has been on an upward trajectory, reaching 110, its highest point in over two years. Some analysts think this presents a bearish outlook for Bitcoin. However, according to Michael Boutros, senior technical strategist at Forex.com, this rally is nearing a long-term resistance level. If this resistance holds, it could reverse the trend, potentially creating a more favorable environment for Bitcoin.

Since its peak on Jan. 13, DXY has dipped 1.27%, but the incoming Trump presidency could reverse this trend, depending upon the policies of his cabinet. 

Federal Reserve benchmark interest rates and Bitcoin 

Federal Reserve interest rates influence borrowing costs across the US. Decreasing rates make borrowing cheaper, boosting demand for risk-on assets. Conversely, rising rates tend to shift investor preference toward yield-bearing assets like bonds.

Bitcoin, too, is considered a risky asset. Researchers from the Swiss bank Piguet Galland have studied the correlation between BTC and interest rates over time.

The graph above shows that the inverse correlation emerged after the post-Covid interest rate cuts when BTC surged to a cycle high of almost $69,000. This was followed by sharp rate hikes in 2022, during which BTC dropped to a cycle low of $16,000. This pattern suggests that Bitcoin is still considered a risk-on asset. 

In addition to the Fed’s Federal Open Market Committee (FOMC), which typically meets eight times a year, other economic metrics like the Consumer Price Index (CPI) are also used by traders as inversely correlated data points that impact Bitcoin price versus the market’s inflation expectations. 

Related: Bitcoin price still on track to $180K in 2025: Interview with Filbfilb

When trading the monthly CPI release, market expectations often matter more than the raw numbers. For instance, the December 2024 CPI, which showed a 2.9% annual inflation rate, met market expectations. The Core CPI, excluding food and energy, came in at 3.2%, better than the anticipated 3.3%. Although still above the Fed’s 2% target, it brought some relief to the markets. Immediately following the news, the S&P 500 climbed 1.83%, the Nasdaq 100 2.3% and Bitcoin gained 4.3%.

So far, “with inflation, good news is good news” for Bitcoin, as quantitative market analyst Benjamin Cowen put it. Decreasing inflation tends to push BTC upward. However, there’s another side to Bitcoin — its role as digital gold, often touted as a hedge against inflation. In this paradigm, it is the increasing inflation that should drive BTC higher, as more people turn to Bitcoin to protect against the depreciating US dollar. As Bitcoin adoption grows, this scenario could materialize, inversing the current correlation.

Bond yields influence on Bitcoin

Bond yields, directly correlated with the Fed's rates and inflation, serve as another valuable metric for Bitcoin traders. High yields on low-risk government bonds can reduce the appeal of riskier assets like Bitcoin that do not generate yield.

Since December 2024, yields on US long-term bonds have been rising, reaching 4.77%, the highest level since 2023. This increase has occurred despite the Fed's cautiously cutting interest rates, fueling concerns about a potential surge in inflation. During this timeframe, Bitcoin price action was mostly negatively correlated with the bonds, confirming the theory.

Government bonds are also directly related to the notion of debt. When governments issue more debt (sell more bonds) to finance spending, the increased supply can lead to higher yields. If the debt reaches unsustainable levels, there is a risk of dollar debasement. The US adding $13 trillion to its debt since 2020 is unsettling news for the economy and, by extension, Bitcoin in the short term. In the longer run, however, this could increase interest in Bitcoin as an alternative currency.

Ray Dalio, CEO of Bridgewater Associates, recognized this possibility. Speaking at Abu Dhabi Finance Week, the billionaire expressed a preference for “hard money” over debt-based investments,

“I want to steer away from debt assets like bonds and debt and have some hard money like gold and Bitcoin.”

Dalio pointed out that rising global debt will likely diminish the value of fiat currencies, predicting inevitable debt crises. So there could come a time when high bond yields signal an economy unable to sustain its own debt. This, in turn, might reverse the current correlation between Bitcoin and bonds.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.