Crypto traders made one of the greatest forex trades in a generation

October 1, 2022

Table of contents

    US Dollar Index (DXY)
    The US Dollar Index (DXY) (Source: TradingView)

    2022 has been a terrible year for almost all asset classes. Crypto markets have fallen significantly since all time highs last year, with the total crypto market cap down to approximately $950 billion, from $2.9 trillion in November 2021. In less than 1 year alone, $2 trillion dollars in Digital Asset values have been wiped out. This bloodletting is also happening in traditional markets, with the S&P500 for example, down almost 25% from highs in December 2021.

    Amidst this chaos however, one asset appears to be shining head and shoulders above all others. The US dollar is thriving, with the US dollar Index (DXY) at a 20-year high. The DXY represents the strength of the Dollar relative to a basket of 6 foreign currencies - and as is clear from the chart below, many people’s bank accounts have experienced a 20% or more depreciation against the US dollar.

    In short, while the US dollar has pumped, many major foreign currencies have dumped.

    TradingView Chart
    (Source: Twitter/TradingView)

    With the strengthening of the US dollar, it appears crypto market participants may have inadvertently executed one of the greatest forex trades of a generation.

    With the aggressive drawdown in cryptocurrency prices this Summer, following the collapse of Terra, Three Arrows Capital & blow-ups across the CeFi ecosystem, market participants fled to safety by swapping their risky assets to stablecoins. The overwhelming majority of these stablecoins are pegged to the dollar.

    The below chart shows the value of $USD pegged stablecoins received to crypto wallets from centralized and decentralized exchanges on the Ethereum blockchain, plotted alongside the US Dollar Index.

    Stablecoin Withdrawals/DXY (Source: Arkham Research)

    As the chart shows, the volume of stablecoins which market participants have been holding increased significantly during the same period DXY experienced a runup. What this suggests is that crypto natives potentially saved millions of dollars of value through swapping their volatile crypto assets for USD pegged stablecoins precisely at the right time.

    It is unlikely that users were swapping to stablecoins to knowingly execute a global macro forex trade, given the rise in stablecoin withdrawals coincides with the drawdown in the crypto market and preceded the accelerating runup of the DXY.

    While traders don’t consider swapping for USD-stablecoins as globally significant, the fact that anyone with an Internet connection and some assets on-chain now has more access to foreign currencies than ever before provides market participants with more ways to preserve wealth and transact using foreign currencies.

    Unfettered access to these foreign currencies through blockchain technology could play a far more significant role in the future of the off-chain economy, as the ecosystem around stablecoins develops further.