Bitcoin, the digital currency that gained notoriety in recent years, is back in the news this week after Chinese regulators announced an investigation into local bitcoin exchanges. The announcement sent the price of bitcoin 13% lower*, and for good reason—China has quietly become the epicenter of bitcoin trading, with more than 90% of worldwide bitcoin exchange trading (an exchange is where individuals purchase and sell bitcoin) currently taking place there.
Why has bitcoin become so popular in China? Though speculation based on rising bitcoin prices is likely playing at least some part, the main driver is the perception of weakness in the yuan. As the chart below shows, the increase in the price of bitcoin from mid-2015 forward has correlated with the weakening of China’s currency over the same period. China has strict capital controls that inhibit the amount of money that can be converted into foreign currency, but bitcoin offers another option for those looking to convert their currency into a form other than the yuan.
Bitcoin saw significant appreciation during 2016, and reached a three-year high in early January 2017 after the People’s Bank of China (PBoC) announced tighter reporting requirements for cash transactions and overseas transfers (reducing the reporting threshold from 200,000 yuan to 50,000), which promoted worries about additional capital controls, though the PBoC denies that capital controls were the driver of the change. The recent fall shows that bitcoin owners are worried that the investigation may lead to more regulations or other consequences, though we would have expected a much larger drop if the future of bitcoin in China was in doubt.
*As of January 11, 2017.
Past performance is no guarantee of future results.
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