Bitcoin's Inverse Ties With Dollar Index Challenged as U.S. Election Looms

• Options show a bullish near-term bias for BTC and USD.
• Rising odds of a potential Trump victory have galvanized demand for BTC upside exposure.

Historically, bitcoin (BTC) has largely maintained a negative correlation with the dollar index (DXY). However, this dynamic may break down around the U.S. election time if the prevailing options pricing is any guide.

At press time, one-month 25-delta BTC risk reversals, the skew in the premium paid for calls relative to puts was 1.20, indicating a bullish bias for the next four weeks, according to options trading listed at the Chicago Mercantile Exchange, widely considered a proxy for institutional activity. The U.S. Presidential Election is due on Nov. 5 and results will be declared on Nov. 8.

A call buyer is implicitly bullish on the market, while a put buyer is bearish and looking to hedge downside risks.

Read more: U.S. Election 2024: Bitcoin and S&P 500 Options Diverge, Hinting at Major Market Moves

Risk reversals for dominant crypto options exchange Deribit's election contracts expiring on Nov. 8 and options with subsequent expiries also showed positive values, indicating a bias for calls, per data tracked by Amberdata.

Meanwhile, 30-day risk reversals for the euro-dollar (EUR/USD), the world's most liquid pair, was -0.39 on the CME, indicating concerns of continued dollar strength in the coming four weeks. The GBP/USD risk reversals suggested the same.

In other words, options signal a continued rally in the dollar index, one of BTC's top nemesis. The euro is the largest component of the dollar index, making up 57.6% of the basket.

It's worth noting that bitcoin has already begun ignoring the dollar index. The leading cryptocurrency by market value rose to nearly $68,000 Monday, reaching the highest since July 29 even as the dollar index held steady above 103.00, consolidating on its 3% rise since late September, data from TradingView show.

Worth being long?

Options traders' upbeat take on BTC comes as supposedly pro-crypto Republican candidate Donald Trump's victory odds grow in traditional markets.

"The upside convexity on a Trump win is worth being long, and we are seeing market participants building positions in the lead-up. In the absence of an escalating crisis, we see BTCUSD at 70,000 in the coming weeks, continuing off current downside support, with equities breaking further highs," crypto liquidity provider Zerocap's Chief Investment Officer Jonathan de Wet said in an email.

Lately, traders have been snapping up call options at a $80,000 strike price. The overall desire for upside exposure is also evident from the fact that the $100,000 call is the most popular option right now, boasting a notional open interest of over $1 billion.

"The U.S. election has emerged as a relatively dominant narrative for crypto over the past six months. Donald Trump’s embrace of the space has been broad, including concrete policy proposals. On the other hand, the nature of crypto policy under a Kamala Harris administration has been unclear," FRNT Financial said in a newsletter on Tuesday.