Does the Price of Yuan and Bitcoin Inversely Correlate?
2016 has seen a massive surge in the price of Bitcoin. At this point last year, 1 Bitcoin was trading for $310, today it’s $680. What has really changed in the public’s mind about Bitcoin? Many are arguing that Chinese buyers are stocking up on Bitcoin as their currency, the Yuan, faces a 6 year low. After-all, 92% of world bitcoin trading is going through Chinese exchanges such as: OkCoin and Huobi. The price of bitcoin has been surging upward during the most recent weeks ending to highs in the mid 600’s. But what was the cause of the increase?
2016: Chinese Buyers Flock to Bitcoin on Yuan Lows
Bitcoin, when priced in Chinese yuan on mainland Chinese bitcoin exchanges, trades at a 7.2% premium compared to USD exchange counterparts. This difference demonstrates an overwhelming demand to purchase Bitcoin, or exchange them. Many argue that this premium is solely due to a higher demand, but it could be a lesser supply to sell in those markets as well. Arbitrage possibilites are endless for those willing to work them.
The Wall Street Journal reports that this demand increase from the Chinese market has been prompted by recent Yuan devaluations. But not everyone agrees with this explanation. Some assert that the rally was tied to other developments both within and outside of the digital currency ecosystem. This includes more secure exchanges, an overall Bitcoin price increase, and increasing stability outside of China.
Speculators hold that Yuan devaluations are pushing Bitcoin’s price up. Chinese exchanges accounted for 42 percent of all Bitcoin transactions for the first six months of 2016, according to an analysis performed for The New York Times.
Bitcoin Isn’t the First Choice for Chinese Moving away from the Yuan
“The theory that the Chinese are buying bitcoin due to yuan devaluation is a nice story to tell, but is in our view incomplete,” Bitcoin is a speculative asset and probably not the best asset. Bloomberg reports that Chinese residents looking to preserve the value of their holdings are turning primarily to USD or EUR, which are much more stable currencies, especially in comparison to Bitcoin.
Chinese Bitcoin Buyers Won’t Stop Soon
Although the continued news of the Chinese Yuan’s devaluation continues to roll in. Other indicators, such as rising corporate debt, as reported by Business Insider, and a Goldman Sachs report on higher than expected debt, could be used to sway potential Chinese buyers further towards alternatives outside of their own country. These indicators are not to be taken lightly, as they are suggesting imminent economic corrections which will have repercussions throughout the world.
That being said, there are many factors that impact the price of a commodity, especially Bitcoin. The volatility of Bitcoin is interesting if you’re a speculator attempting to profit on upswings and downswings, but also extremely difficult. Price volatility for a currency is certainly not a good thing, but relativity is important too. The unstable nature of the any currency is a major concern for people utilizing it as a store of value. Imagine yourself at the edge of a storm, will you attempt to fight the storm for your money or will you put it elsewhere and head for cover?