All trading involves risk. Losses can exceed deposits.
Over 40 years’ heritage
Over 185,000 clients worldwide
Over 15,000 markets

Biting on the Bitcoin

Created with the aim of becoming the world’s currency, the cryptocurrency, bitcoin, has certainly been less as decentralized as what the original creators had probably hoped for. 

All trading involves risk. Losses can exceed deposits.

Since late 2015, we have seen bitcoin and USD/CNH moving in tandem with 99% of bitcoin reported to be traded in China1. Like a pot that has shrank in size, the diminishing holding power and attractiveness of the Chinese currency led to capital outflow in all directions into avenues including housing, commodity and the bitcoin.

Capital outflows have become a clear concern for Asian markets, especially China, since the US interest rate hikes outlook returned to the fore in building US dollar strength. Similar to the Malaysian ringgit, steep declines are not too distant memories for the Chinese yuan and have once again propelled these currencies to attention.

Bitcoin

Measured against the US dollar, the offshore yuan has fallen 5.7% and 6.2% in 2015 and 2016 respectively, sending the market on a run for the hills once again. This was despite the fact that the Chinese currency clocked visible gains against other major and Asian currencies in the past six-month period. Last week, China reported on their foreign reserves, which was exhausted to the lowest level in nearly six years at $3.011 trillion as of December 2016. To the markets, it is clear that the authorities have been defending the yuan, but this had not been enough to keep a lid on the outflows.


 

China Monthly Foreign Exchange Reserves

A slew of policies have been introduced to curb the various outflow channels and just the mention of bitcoin had been enough to send prices down 11.0% in one day on January 4 before examinations of bitcoin exchanges pushed it further to drop 13.3% on January 11. The $21 billion pot, accounted for by the 21 million coins (approx.) at $1,000 each, may not be a significant amount, compared to the amount that has departed the country in the past months, but have certainly caught the attention of the authorities. Mixed opinions have been cast on how feasible are controls by the Chinese government but prices certainly seem to be suggesting the worst with panic selling.

For the bitcoin, prices are at present a struggle between Chinese demand and Chinese authority controls. Wednesday’s 13.27% drop mark the steepest dip in percentage terms since January 14, 2015, when prices had fallen briefly below the $200 mark. In the fintech revolution, bitcoin is highly likely to remain a hallmark and stand to benefit in the long run. However, until then, expect developments in the Chinese markets to sway prices.

As things stand, the US dollar still has room to run on the upside which could keep mainland investors peeled for opportunities. The Bloomberg median forecast for the offshore yuan, USD/CNH, sits at $7.20 at the end of 2017 which will be a 4.2% increase from the current traded level at $6.90. Three hikes expected by the Federal Reserve Open Committee (FOMC) December summary of economic projections, if realised, would pile into the pressure upon emerging Asian currencies.

We are not one to speculate on the extent of control that the People’s Bank of China (PBOC) could exert, but according to Bloomberg news, the Chinese central bank have been looking for evidence of violations in their probe on Wednesday and the conviction of market manipulation or money laundering could send bitcoin declining more than the 20% year-to-date loss.

http://www.marketwatch.com/story/bitcoin-hits-3-month-high-as-chinese-investors-flee-falling-yuan-2016-10-24   

Bitcoin trading

You don’t need to own cryptocurrencies to trade on them.
Find out more about trading on bitcoin with IG.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Education

  • What is short-selling?

    Short selling enables traders to profit in a down market or protect existing investments. Find out how and why short selling can become a key part of a balanced trading strategy.

  • Sectors

    Find out more about other markets that we offer, from how they work and what they cover to how you can spread bet and trade CFDs on them.

  • Leverage and margin

    In this section we introduce our trading platform and illustrate the ease with which you can trade CFDs on a wide range of markets. We also cover features such as stops and limits and explain how trading with leverage works.