Chinese regulatory authorities imposed a ban on initial coin offerings (ICO) in September 2017, forcing all crypto asset (cryptocurrency) exchanges to close business. Yuan-denominated Bitcoin (BTC) trading was considered to have accounted for over 90% of all transactions before and during September 2017.

While there has been no open data, such as on yuan-denominated trading, in the global cryptocurrency exchanges since the regulatory ban, yuan-denominated BTC trading can be seen on peer-to-peer (P2P) trading platforms, including LocalBitcoins. Because traders are able to overcome access controls imposed by regulatory authorities on cryptocurrency-related websites using such means as virtual private network (VPN) connections, China money is believed to have remained in the cryptocurrency market. Therefore, I compared the market capitalization of BTC with the amount of change in the BTC price from the previous quarter with errors and omissions in China’s capital balance as a surrogate variable for capital outflows.

There was no noticeable increase in the market capitalization of BTC from the latter half of 2015, when China devalued the yuan, until 2016. Looking at the period during and after 2017, however, the correlation coefficient between errors and omissions and the amount of change in the market capitalization of BTC was -0.6; the BTC price increased in line with the increase in capital outflows from China in the latter half of both 2017 and 2019. A reflux of capital to China occurred and the BTC price fell in the first half of 2018. As for 2017 onwards, over 30% of errors and omissions in China seem to have affected the market capitalization of BTC. Although the market capitalization of BTC could have been boosted in the fourth quarter of 2019, where errors and omissions amounted to USD 62.6 billion, they only caused a reduction in the decrease of market capitalization (source: The State Administration of Foreign Exchange of the People’s Republic of China, CoinMarketCap).

While some argue that changes in foreign reserves represent capital inflows/outflows, a comparison of month-to-month change in China’s foreign reserves with the amount of change in the market capitalization of BTC identified no expected correlations between the two. Monitoring capital inflows/outflows in China and cryptocurrency market trends may continue to provide a clue to predicting market moves without regard to the easing of cryptocurrency regulations in China.

※This article was written by FISCO.