The trading volume coming out of China suggests a correlation with the price of Bitcoin. The influence of the Chinese yuan has shown itself especially in the second half of 2016.
The year 2016 has seen the price of Bitcoin exhibit some significant activity. In its overall trend, the price of the world’s number one cryptocurrency has risen significantly within the year.
Recently, a closer look at their behavior reveals a developing correlation between the price of Bitcoin and the value of the Chinese yuan. Financial data coming out of China in recent times has also been seen to cause a significant impact within the Bitcoin market. Indeed, such a development has not gone unnoticed.
The population effect
Founder and CEO at Cashaa, Kumar Gaurav, identifies the Chinese population as a huge determinant of the eventual quasi-synchronization in price between Bitcoin and the Chinese yuan. Gaurav explains that the population directly determines the supply and demand power of China within the financial market.
“When it comes to owning Bitcoin, Chinese have more advantage than any other country due to the large local mining farms. They are the production hub of Bitcoin, like the Middle East for oil. Any effect which creates fear of devaluation of Chinese yuan will trigger the demand for Bitcoin in China,” says Gaurav.
Gaurav also notes that local supply will usually ease the acquiring process of Bitcoin, which will create pressure on global supply and affect the price of Bitcoin.
He gives an example using the situation in India - second largest population, after China - where the news of demonetization has fuelled the demand for Bitcoin. Price has risen, yet there is an insufficient supply to meet the demand at any price. However, regulation has made it impossible to buy from the international market.
“If this happens in China, it will affect the entire world supply,” concludes Gaurav.
Pursuit of safety
By his own observation, Patrick Dugan of Omni Foundation also identifies the seeming relationship between Bitcoin and the yuan. He attributes this behavior to “Chinese capital flight.”
According to Dugan, Chinese savers and investors are fleeing the devaluation of their currency and using Bitcoin as a means of conveying value into USD as an alternative portfolio hold, and as a speculative trading vehicle.
From a technical perspective, he also says that the CNY volume, adjusting for average market depth and reducing the volume for the effect of algorithms that paint the tape and self-trade to pump up volumes, is significantly greater than USD volume. Thus, he states that for every one percent that the CNY devalues, Bitcoin pops 10-15 percent.
“You have to think that for every one percent the USD/CNY moves, hundreds of billions of profit/loss from actual derivatives contracts is transferred, and likewise hundreds of billions in nominal USD-denominated GDP is struck off. So adding a billion to the valuation of Bitcoin is really just catching a bit of splash,” he concludes.