Disclosure: I am long bitcoin.
The Trump administration’s protectionist trade policies, especially the tariffs placed on Chinese goods, may be driving the rapid recovery in the value of the most well-known crypto-asset, Bitcoin, over the past six weeks.
Bitcoin – and its underlying blockchain technology – was thrust into the media spotlight in the fall of 2017 when the price of the crypto-asset shot up from about $1,200 in April 2017 to $4,500 by September. Asking prices for bitcoin spiked to an all-time high of $20,078 on December 17 before collapsing.
After a series of “dead cat bounces,” bitcoin settled in the mid-$6,000 range over the summer of 2018, then fell precipitously to the mid-$3,000 range in late November. Bitcoin bulls in the press and social media fell quiet, interest waned in crypto-assets, and the pace of initial coin offerings by new projects abated.
Quite recently, though, bitcoin has regained its momentum. In the past three months, the crypto-asset’s value has climbed 134 percent, and on the afternoon of Thursday, June 20, it broke through $9,500, setting a new 52-week high.
There is reason to believe that the Trump administration’s trade war with China and China’s policy responses have a lot to do with the sudden surge in bitcoin’s price.
On May 10, President Trump hiked duties on almost $200 billion worth of Chinese goods from 10 percent to 25 percent. In the month of April, bitcoin traded between $4,900 and $5,400, slowly rising as trade tensions simmered. Shortly before the new increased tariffs were announced, bitcoin started climbing faster. Over the course of May 10, bitcoin ramped from $6,272 to $6,559, a significant one-day move of 4.5 percent.
Why? Chinese retail investors knew what was coming – a further devaluation of China’s currency, the yuan. The Chinese government’s devaluation of its currency, of course, is an old talking point for President Trump, but it’s worth recounting the reason behind it if we’re to understand why Chinese investors could be ditching the yuan for bitcoin.
Imagine that you’re a company that sells Chinese-made goods in the United States. You buy goods in China in the local currency, the yuan, and then sell them in the United States for dollars. If a 10 percent tariff is placed on Chinese exports to the United States, then you are penalized – you have to pay 10 percent of the goods’ value in dollars to the U.S. government before you can bring it on-shore. Now you’re in the position of figuring out where to recover those costs, either by squeezing your suppliers or passing the cost on to your customers.
The Chinese government has its own way of lessening the burden tariffs put on its exports – it devalues its currency against the dollar. Remember that importers buy with yuan and sell for dollars. If the yuan falls against the dollar, that means that the importer’s costs go down relative to its revenues. So far this year, China has depreciated the yuan against the dollar by more than 9 percent.
Chinese retail investors – and by the way, ‘retail’ doesn’t mean middle-class, it refers to individuals moving their own money – have long used bitcoin as a vehicle to get their wealth out of the yuan and the country. It’s difficult to pin down bitcoin trading volume by country, but it was widely reported that the late 2017 bitcoin bubble was fueled by Chinese retail investors.
In February 2018, the People’s Bank of China (PBOC) said that it “would block access to all domestic and foreign cryptocurrency exchanges and ICO websites,” and over the course of last year, the PBOC shut down approximately 90 exchanges.
Today, there isn’t a reliable, 24/7 way to trade bitcoin in China, but according to a Forbes article from May, bitcoin buyers and sellers have migrated to WeChat groups, where the crypto-asset is traded over-the-counter. Dave Chapman, chairman of OSL, a Hong Kong OTC brokerage that trades more than $1 billion a month, told Forbes that he believed that up to 20 percent of total global crypto trading volume originates in China, even more than a year after the ban.
The famous hedge fund investor Paul Tudor Jones said, in a 1987 PBS documentary simply titled Trader, that “the whole world is simply nothing more than a flow chart for capital.” He meant that depending on a variety of factors – an almost innumerable set of variables – people put capital into different assets. These factors include things like macroeconomic conditions from country to country and across the globe, the investor’s appetite for risk and desired returns, as well as adjustments that have to be made due to public policy changes and the behavior of other investors in capital markets.
In my view, Jones’ dictum is an excellent insight into the bitcoin price movement. In the crypto media, too often volatile swings in the price of bitcoin are attributed to headlines about crypto-assets themselves – rumors that institutional investors like JP Morgan or Goldman Sachs will begin trading them for clients, or the recent news that Facebook and a consortium of other tech companies are launching a token called Libra.
One reason is because there’s a dearth of fundamental data about bitcoin itself. Crypto-asset analysis is dominated by technical analysis and the close examination of supposed patterns in charts. When analysts speak of ‘fundamentals,’ they tend to refer to metrics like trading volume, hash rate, number of miners, and other attributes of the bitcoin network.
But Jones reminds us that movements in the price of an asset might not be based simply on news about the particular asset class itself. The world is a flow chart for capital, he said. In other words, capital moving into bitcoin and bidding it up has to come from somewhere, and it has to come from a place that is less hospitable to capital than bitcoin. Instead of looking at hype around other crypto-assets like Libra, for why bitcoin is surging in value, it makes sense to look at where the money is coming from – at least that is the thesis of analysts who think that Chinese retail investors are getting their wealth out of the sliding yuan and putting it into bitcoin so that it can’t be manipulated by the Chinese government.
President Trump has said that he is considering levying tariffs on the remaining portion of Chinese goods that have been so far unaffected; goods worth about $300 billion. If those tariffs go through, the Chinese economy will be under further pressure. Already, GDP growth is slowing, and Fitch Ratings forecasted a few weeks ago that 2019 would see a record number of Chinese corporate bond defaults. New tariffs would put pressure on the PBOC to do further stimulus and protect China’s export economy.
If devaluing the yuan is part of that response, expect the price of bitcoin to rise even higher. If the yuan falls against the dollar and bitcoin rises, it would mean more evidence in support of the ‘capital flight from China’ theory. If the yuan falls against the dollar and the price of bitcoin doesn’t move upward significantly, then there could be another explanation for its bull run (although no one is claiming that Chinese investors are solely responsible for the current run-up – if 2017 taught us anything, it’s that bitcoin behaves like a momentum stock and investors rush in as the price rises). If the People’s Bank of China doesn’t adjust the yuan – unlikely but possible – then the theory will be neither confirmed nor denied.