Some analysts suggest that there still exists a strong correlation between Bitcoin price and the Chinese market. While this correlation has not been proven, it is an interesting indicator of Bitcoin price to consider.
On April 12, the Chinese yuan strengthened against most of the world’s reserve currencies, including the US dollar.
Immediately after the initial surge in the value the Chinese yuan, Bitcoin price, as listed on major Bitcoin exchanges, fell by around five percent from $1,232 to $1170.
Although a five percent fluctuation in Bitcoin price is often perceived as normal daily volatility, the correlation between the decline of Bitcoin price and the strong performance of the yuan triggered the interests of day-to-day traders.
BTC/CNY - a major determining factor of Bitcoin price? Not anymore
In the past, BTC/CNY pair was considered to be a major determining factor of Bitcoin price until Chinese regulators enforced a policy which required local Bitcoin exchanges to implement trading fees.
Upon the integration of a small trading fee, inflated trading volumes of Chinese exchanges vanished, massively decreasing the daily trading volume of the Chinese Bitcoin exchange market as a whole.
Until late 2016, the Chinese Bitcoin exchange market was believed to process around 95 percent of global trading. However, the enforced trading fees unraveled the true volume of Chinese Bitcoin exchanges, which currently only account for eight percent of the global Bitcoin exchange market.
With eight percent of the global Bitcoin trading volume, it seemed unlikely that a factor which affects the Chinese market would impact the global Bitcoin exchange market and ultimately, Bitcoin price.
Reactive trading from the US traders matters more
Some traders including Tone Vays noted that the US market and its traders closely follow the Chinese market and a correlation between the Chinese market and Bitcoin price could actually stem from reactive trading from US-based traders and investors.
Simply put, US traders expecting Bitcoin price to decline as a result of the strengthening of the Chinese yuan sell the digital currency which leads to a short-term fall in Bitcoin price.
Currently, with over 27 percent of the global Bitcoin trading volume and as the second largest Bitcoin exchange market, the US has substantially more leverage over Bitcoin price than the Chinese market.
Therefore, it is highly likely that reactive trading from the US traders often leads to the decline of Bitcoin price upon the increase in the Chinese yuan.