Tag: capital controls

Defying fundamentals: Yuan drops but Bitcoin remains stable, Ethereum to benefit?

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Start of the year and the behavior of Bitcoin has been surprising people around the Globe. A sudden halt to the trend, as the price reached the peak and now most unexpectedly the price is unaffected when Yuan is dropping. ‘Bitcoin Trading-101’ would any day tell you to keep an eye on China and Yuan for hints about price movements. This held well until the start of New Year but suddenly has become a futile pro tip. Institutional Investors and Intraday traders are all baffled by this anamoly. Let’s dive deep into understanding how exactly Bitcoin dynamics have changed w.r.t China:

China’s rumored desperate attempt and failure:

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While the Bitcoin price was soaring, US dollar was at a three week low strengthening Yuan. China has plans to devalue Yuan further to 7.15% from 6.8125% this year to maintain good returns on exports. But with Yuan strengthening organically, rumors were floating in the market that China might order their state-owned companies to sell their foreign reserves. However while these might be just rumors effecting the market, Yuan devalued further and this time Bitcoin prices have remained stable.

Strong Capital controls taking the steering?

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The Chinese authorities have closely monitored Bitcoin in 2016 to control and curb corruption that is hampering their economy. After gathering sufficient information, they have concluded that investors are using Bitcoin to send the money out of the country. China as such has strong capital controls and conversion of local currency into foreign currency is well regulated. However Bitcoin having a peer to peer nature and doesn’t get accounted in these regulations. Hence Chinese authorities have employed strict capital controls over Bitcoin. These measures require identification and completion of detailed forms to convert yuan into Bitcoin. With Yuan’s fall not boosting Bitcoin price, one might suspect that these controls are in place and functional.

Who will benefit from this?

If China slowly fades out from Bitcoin scenario as major driver of price and volumes, next in line would be India. With a large population that recently underwent demonetization and has been adopting Bitcoin and digital payments, India can be the next big player in Bitcoin. The budding digital currencies and blockchain startup scenario in India is surely promising in this prospect.

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While Bitcoin price has remained stable in between $900-$910, Ethereum is experiencing an unusual price surge with Yuan devaluation. If it’s the case where the Chinese are now moving funds to Ethereum then it’s only a matter of time before the Chinese government realizes it. This would put all cryptocurrencies in a position to endure complete regulation in China.

China looks to halt Yuan’s fall, tumbles Bitcoin instead

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Ironically, for a country that has banned Bitcoin and other cryptocurrencies, China remains to be the highest contributor to Bitcoin in terms of volume. With a total contribution of whooping 96% in 2016, China is a major influencer when it comes to Bitcoin prices. Be it the surprise bull run mid – 2016 or the short term fall in prices or the big push towards the end of the year, China has always had a major hand in it. Coming strongly into the New Year, the Bitcoin Bull Run came to a halt owing to Chinese policies. 5th of January saw Bitcoin dropping from near all-time high to under $950 in a short span of time. Let’s dive deep into how this happened and what might be the fate of Bitcoin from here:

Capital controls kicking in?

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The Chinese authorities have closely monitored Bitcoin in 2016 to validate the boost patterns. After thorough analysis, they have concluded that Bitcoin is used to launder money out of the country. China as such has strong capital controls and conversion of local currency into foreign currency is well accounted. Owing to the peer to peer nature of Bitcoin, it has become one of the viable routes to launder money out of the country. Hence Chinese authorities have employed strict capital controls over Bitcoin. These measures require identification and completion of detailed forms to convert yuan into foreign currency. These measures may now be starting to work as the currency becomes scarce offshore.

Halting the Yuan’s fall:

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Chinese Yuan increased by 1% following a weak dollar as interest rates rose by 96% in Honk Kong on Thursday. While China has halted the Yuan devaluation temporarily after being included in the SDR basket, they still have some devaluation left to do. Market analysts are betting on a decline of yuan this year to 7.15 from the current 6.8125 but this would trigger a hostile situation with USA. Hence to hold off on the same order China might order their state-owned companies to sell their foreign reserves.

Future Dynamics with US and effect on Bitcoin:

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Trump has labelled China as a currency manipulator and aims to negotiate a “fair and free” trade arrangement with China. To escape the falling value of their currency, Chinese citizens started investing in Bitcoin, changing the path of the capital. To stop further devaluation, China is looking to sell foreign reserves. But as this can’t be executed completely owing to US policy intervention, further devaluation of Yuan is likely and definitely set on the cards. Hence Bitcoin will continue the climb once the Yuan dynamics strike a balance.

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