says bitcoin (BTC) traders should be mindful of price changes in the yuan. This is because, historically, the cryptocurrency has performed positively at moments when the Chinese currency has shown weakness.
The Yuan (CNY) hit its lowest level since early September, falling to 7.1613 per US dollar, taking its cumulative Monthly and annual losses to 1.4% and 2.85%, respectively.
The decline to an eight-month low could be a result of the US's response to China's proposed security law for Hong Kong. Sen. Marco Rubio tweeted Tuesday that the U.S. would impose sanctions on China if the controversial law was applied to Hong Kong.
“If China's yuan continues to weaken against the dollar, we could relive the 2015 and 2016 years when the yuan weakened and BTC strengthened,” said Chris Burniske, a partner at venture capital firm Placeholder.
The chart above shows the bitcoin and dollar/yuan correlation between 2015 and 2016.
In August 2015, the Central Bank of China surprised markets by lowering CNY by 3.5%. The Chinese currency closed 2015 with a 5.5% loss against the dollar; Bitcoin posted a 34% gain.
Another wave of yuan devaluation rattled financial markets in early 2016, with the currency ending this year at a loss of 7%. Likewise, Bitcoin has risen by 125%.
Therefore, there appears to be a correlation between the two entities in 2015 and 2016. But correlation does not mean an absolute causation. So there may not be a cause-and-effect relationship between the two.
Some analysts have long argued that the fall in value in the yuan has led to an increased flow of money into Bitcoin.
The yuan, for example, had fallen below 7 per dollar for the first time on August 5, 2019, amid the US – China trade war. Bitcoin rose 7% that day, and the increase began an hour before the yuan fell below the key level. As a result, some observers, including leading analyst Alex Kruger, wondered whether Bitcoin was a pioneer in this price change.
“Last year we witnessed flows from yuan to BTC in the midst of trade problems,” said Matthew Dibb, co-founder of Stack, a provider of cryptocurrency trackers and indexed mutual funds.
Did the bitcoin and yuan correlation always hold true?
But skeptics countered that claim, noting that the increase seen on August 5 was short-lived and that the cryptocurrency suffered sharp losses over the next four months, although the yuan continued near levels of 7.20 per dollar.
Essentially the positive correlation between USD/CNY and Bitcoin was hardly effective in the second half of last year. Also in 2018, both Bitcoin and yuan suffered losses.
It can be argued that the yuan decline seen in 2015 and 2016 coincided with the cryptocurrency's upward spree that followed the second halving, which took place in July 2016.
However, since the narrative that the fall in the yuan led to the increase in the BTC is still strong; tracking yuan price movement from devame may be important. Also bullish narratives in crypto markets tend to be self-fulfilling prophecies, as evidenced by Bitcoin's halving rallies.
Bitcoin as a macro entity
In addition, Bitcoin may be more sensitive to developments in the yuan market this time around, as cryptocurrency has become a macro asset this year as corporate participation has increased.
“It is no longer possible to study the crypto market without analyzing the rest of the macro markets, " Messari analysts said in a Tuesday news release. The 2020 recession officially marks the beginning of Bitcoin as a macro asset class. For retail and institutional investors, Crypto is not the only asset class in their portfolios. Therefore, it is quite important to look at crypto from a portfolio perspective as well,” he said.
Indeed legendary fund managers like Paul Tudor Jones have recently given their weight to Bitcoin, calling cryptocurrency a hedge against inflation.
“Bitcoin reminds me of the state of gold in 1976, when I first went into business,” Jones said. Gold, a precious metal with limited supply, has tended to gain in value during the fiat currency devaluation.
Rise in bitcoin
Some analysts expect the yuan to fall further in the face of U.S. – China tension and strong gains in the cryptocurrency.
“As the United States and other countries retaliate against China's proposed security law, with the yuan depreciating, we can expect BTC to once again take advantage of this as a safe haven alternative,” Dibb said.
Meanwhile, B2C2 chief executive Phillip Gillespie said he personally expected a rise in Bitcoin because of central banks printing more money and geopolitical risks.
“I expect some seriously anti-China rhetoric in the coming days/weeks/months as Trump tries to use nationalism, protectionism and anger against China as a key catalyst,” Gillespie said, adding that we will soon find out if there is a positive correlation between dollar/yuan and Bitcoin yields.