Bitcoin: Is the Perfect Storm Brewing?
It feels like the perfect storm is brewing for Bitcoin right now. Currency wars, weak stock markets and related capital flights all potentially stand to benefit the cryptocurrency. Is the world waking up to bitcoin's potential strength under these conditions?
It started with Trump and his trade war with China, most recently threatening to impose an additional 10% tariff on $300bn worth of Chinese goods.
Beijing this week has allowed its currency (the yuan) to weaken to more than 7 per U.S. dollar, the lowest in a decade. A weaker yuan makes Chinese exports more competitive, so the devaluation is seen as an attempt to offset the impact of the higher tariffs.
In turn this led to the Trump administration labeling China a currency manipulator, the first time the US has done this to a major trade partner since 1984.
However, a weaker yuan will also make imports into China more expensive, potentially driving up inflation, creating strains in its already slowing economy and pushing currency holders to invest in other assets.
These are the two largest economies in the world. It's a dangerous game they are playing, highlighted by a tweet from Larry Summers, former secretary of the Treasury under Bill Clinton.
Stock Market Declines
At the same time, global stocks have started moving lower. The Dow saw its worst trading day of the year on Monday. Elsewhere, Hong Kong's rout continues....
Amidst these declines, news sources are increasingly touting bitcoin as a potential hedge, joining traditional "safe haven" assets such as Gold and the Swiss Franc. Its correlation with stocks has indeed turned from insignificant to moderately negative, meaning money is more likely to flow in during amidst a declining stock market.
With a devaluing currency, the people of China are incentivized to move money out of the country. The weakening of the yuan has implications elsewhere too, including the increased likelihood of major issues with the Hong Kong dollar (who's value is pegged to the yuan). The size of a capital flight from these countries is potentially huge, particularly as equity markets weaken too.
I would note that China forbids its citizens to move more than $50,000 out of the country per year, however the rich have found other ways such such as via foreign real estate, creative foreign investments and bitcoin. For this reason, the government made it difficult for its citizens to buy cryptocurrency, in 2017 for example they shut down local exchanges. However trading continued regardless and they have recently softened their stance. Importantly, in mid-July of this tear, a Chinese court legally recognized bitcoin as digital property.
Back to Bitcoin
In retrospect, there's a high chance that it was Chinese investors who pushed bitcoin into bull market territory this year. Given the current economic circumstances, that trend looks likely to continue. There are more than $27 trillion in Chinese deposits alone, yet the total crypto market cap sits around $300 billion. If 1% of Chinese deposits moved into bitcoin to facilitate capital flight, the crypto market cap would almost double in size. Add to that the increasing recognition as a "safe haven" in times of stress (e.g in the stock market) and the current bull case for bitcoin is becoming more clear.
There's no doubt that a storm is brewing and it appears that bitcoin is very well placed not just to weather it, but to thrive on it.