For years, traders looked to global M2 money supply as a key gauge of liquidity and risk appetite. However, according to on-chain analyst Willy Woo, that era is over.
Liquidity is a fundamental driver for risk assets like Bitcoin, creating the capacity for price movement, but psychology determines when that movement happens.
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DXY Emerges as Leading Bitcoin Macro Indicator, Says Analyst Willy Woo
Willy Woo argues that the US Dollar Index (DXY), not global M2, is now the most accurate indicator for Bitcoin’s direction. This shift in focus has prompted many investors to reassess traditional metrics of assessing liquidity and market risk.
“Markets don’t follow the expansion of global M2; they are speculative. Risk assets lead M2… BTC acts like a liquidity-sensing mechanism. M2 is a flawed metric because it’s measured in USD, but only 17% of global liquidity is actually dollars,” Woo wrote on X (Twitter).
According to Woo, the DXY—which reflects the dollar’s strength against a basket of major currencies—provides a clearer lens into global risk sentiment and exhibits an inverse correlation to Bitcoin. This correlation suggests that as the dollar’s strength fluctuates, so too does Bitcoin’s value.
Recent analyses have highlighted the emergence of a strong MACD (Moving Average Convergence Divergence) divergence between Bitcoin and the inverse DXY charts, signifying an evolving landscape in market observation. Investors now face a compelling scenario where the dynamics between the dollar and Bitcoin may redefine trading strategies.
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Woo elaborates that a high DXY indicates a “flight towards safety” and represents risk-off sentiment in the market. He adds a caveat regarding the long-term debasement of the dollar, averaging around 7% annually.
“High DXY (strong dollar) means a flight towards safety and risk-off sentiment…USD is considered a safe-haven currency (never mind in long time frames it debases at 7% per year),” Woo explained.
To simplify, when the dollar strengthens, liquidity in the market tightens, leading to a potential depreciation in Bitcoin’s value. Conversely, a declining DXY can signal a reinvigorated risk appetite, spurring Bitcoin’s price to surge as liquidity rejuvenates.
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Analysts Split on DXY’s Next Move
Though Woo advocates for DXY as Bitcoin’s current guiding compass, not all analysts agree on its trajectory. Macro trader Donny Dicey sees the dollar nearing a downturn, suggesting that could initiate Bitcoin’s next breakout phase.
“Gold has telegraphed what’s coming for DXY — it has been leading DXY… Gold typically front-runs DXY’s trend… It tends to sniff out easing conditions ahead of time, as it reacts directly to liquidity expectations, rather than the official policy shifts. Gold’s breakout is signaling that the market expects the U.S. to weaken the dollar,” Donny explained.
According to Dicey, the recent rounded bottom shaped by the DXY chart parallels Bitcoin’s rounded top, hinting at a pivotal inflection point. He posits that once the DXY fairs, liquidity can surge back into the market—resulting in explosive reactions from Bitcoin.
However, contrasting opinions exist within the analyst community. Expert Henrik Zeberg projects a potential rise in DXY to levels between 117 to 120 by year’s end, maintaining that the “King Dollar” narrative remains robust.
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“A strong dollar means pain for risk assets,” echoed investor Kyle Chasse, citing Zeberg’s model.
Such an upswing in DXY could impose significant stress on both equities and Bitcoin, reinforcing Woo’s assertion that monitoring DXY is now the more strategic endeavor for traders eager to capitalize on forthcoming macro cycles.
As the fate of global liquidity appears intricately tied to the strength of the U.S. dollar, understanding the correlation between DXY and Bitcoin may emerge as a defining aspect for traders in 2025. If Dicey’s easing scenario materializes, we could witness Bitcoin’s next price surge; alternatively, if Zeberg’s “King Dollar” view prevails, risk assets can expect further pressure before any reprieve emerges.
Regardless of the path forward, investors are advised to undertake their own research and keep a vigilant eye on the dollar’s movements, rather than M2. In today’s rapidly changing speculator landscape, Bitcoin increasingly aligns with the dollar’s fluctuations, making it crucial for traders to adapt their strategies accordingly.
