Bitcoin rises as the yuan falls. According to a Bloomberg analysis of the 30-day correlation between the two currencies, the inverse relationship between China's currency and the world's largest cryptocurrency has stayed true for much of the past year, and it just reached its greatest level on record.
The strengthening of the association between a weaker yuan and a stronger Bitcoin shows that the yuan is being used as a hedge (i.e. protection) against a trade war that may have a significant impact on the Chinese economy. It also demonstrates investors' growing acceptance of cryptocurrencies, despite the fact that they are still relatively new and unregulated investment vehicles, making them vulnerable to fraud and volatile.
What Does It Imply for Investors?
According to Dr. Garrick Hileman, a researcher at the London School of Economics and Blockchain.com's research director, Bitcoin is being utilised as a safe haven amid economic uncertainty as the trade war with the United States impacts on China's economic growth.
"There's proof for this in the fact that when the yuan plummeted, people in Asia paid more for Bitcoin than people abroad," he said. "You can see that in the premium price paid for Bitcoin on exchanges like Huobi that cater primarily to Chinese customers."
Back in the spring, when the negative correlation between the two currencies peaked at roughly -0.58, it became more apparent (a reading of -1.0 represents a perfect inverse correlation). According to Bloomberg, the inverse connection reached a new high of roughly -0.67 at the end of August.
The rise in the negative correlation in May appears to have coincided with the Trump administration's declaration that tariffs on $200 billion worth of Chinese imports would be raised from 10% to 25%. China countered by announcing its own tariff rises two days later.
Both countries engaged in trade hostilities throughout August, with threats and rhetoric ranging from the US labelling China a currency manipulator for allowing the yuan to fall to its lowest level in 11 years to the US labelling China a currency manipulator for allowing the yuan to fall to its lowest level in 11 years. The recent climax in the negative relationship between China's currency and Bitcoin was precipitated by announcements of tit-for-tat tariffs at the end of August.
Looking Ahead
While both the trade war and China’s slowing economy seem to be prompting investors to dump yuan in favor of Bitcoin, there is another factor driving the phenomenon—the increasing legitimacy among investors of digital cryptocurrencies. In July, a local court ruling in China stated that Bitcoin was a virtual asset to be protected by Chinese laws. That’s the first time any local court has reached such a ruling, according to Bloomberg.
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