How are overseas expectations of the yuan’s depreciation (appreciation) related to the Bitcoin price?

At its peak, yuan-denominated Bitcoin (BTC) trading was once said to have accounted for over 90% of overall trading. However, after the Chinese regulatory authorities imposed a ban on initial coin offerings (ICO) in September 2017 and forced major crypto asset (cryptocurrency) exchanges to close business, the volume of yuan-denominated trading has not necessarily been high.

 

Compared to onshore yuan (CNY), offshore yuan (CNH) is more easily reflected in overseas assessments of the yuan. While the gap between the two is not so significant, it widened slightly in August-October 2015, January-June 2017, January-February 2018, August-September 2019, May 2019, and March 2020. Assuming that the time when the gap between CNH and CNY widens is the time when expectations of capital inflows and outflows into and out of China are growing, I analyzed how the BTC price fluctuated before and after that time.

 

From January to June 2017, there was a long period when CNH less CNY was in negative territory. Overseas expectations of the yuan’s appreciation were high, while expectations of capital inflows into China remained strong. This gap shifted into positive territory in and after July 2017. Until around January 2018, expectations of the yuan’s depreciation were high, while expectations of capital outflows out of China were strong. The BTC price during the period rose suddenly from the USD 2,000 level to a record high price of USD 19,114. CNH-CNY has been mostly in positive territory since January 2020. While expectations of capital outflows out of China are believed to be higher, no impact has been seen on the BTC price.

 

Here are examples of cases where an expansion of the gap between CNH and CNY affected the BTC price in the short term. Between May 9 and 16, 2019, as the gap widened from 0.01 to 0.04, the BTC price increased 33% on May 15 (vs. May 9). Between March 12 and 19, 2020, as the gap widened from -0.001 to 0.05, the BTC price increased 34% on March 25 (vs. March 12). One way to interpret this is that, during these periods, the BTC price increased several days after expectations of capital outflows out of China increased.

 

Meanwhile, between December 5 and 12, 2019, after the gap widened from -0.004 to -0.06, the BTC price dropped 11% on December 17 (vs. December 5). It can be argued that during this period, the BTC price fell several days after there was a sign of an increase in expectations of capital inflows into China.

 

However, it is difficult to say that all of the gaps between CNH and CNY affected the BTC price. There are many exceptions, including the case in early February 2018 where gaps in positive territory widened temporarily, but the BTC price kept falling. However, checking trends of CNH and CNY along with BTC on a regular basis may provide a clue to predicting market moves.

 

This article was written by FISCO.