Chinese Yuan Devaluation Fails to Fuel Bitcoin Price Rally

The connection between the Chinese yuan and the price of bitcoin appears to be weakening.

Despite assertions that macroeconomic fears in China are one factor boosting the price of bitcoin, the nation's recent decision to lower the yuan’s currency peg by the largest amount since August notably failed to cause a significant change in the digital currency’s price this week.

Arguably almost entirely driven by long-term bullishness and sentiment, it's become a passtime of bitcoin industry observers to attempt to correlate movements in the market with larger, macroeconomic trends, and China has become a particular point of focus given the outsized activity on local exchanges.

Still, in practice it remains to be seen whether this relationship is effective marketing or a sound indicator for traders, and this week's events provided the latest data point in this ongoing exploration.

On 27th June, the People’s Bank of China (PBOC) reduced the yuan’s peg to¥6.6375 per dollar, which represented a 0.9% drop, Bloomberg reported. By 10:44 UTC, China’s currency had fallen ¥0.3% to 6.6473.

As a result, the yuan-dollar exchange rate was close to its lowest since December 2010.

However, in the wake of these events, the price of bitcoin hardly moved, fluctuating primarily between $630 and $660 on 27th June and falling into an even tighter range between $640 and $660 on 28th June, CoinDesk’s USD Bitcoin Price Index (BPI) revealed.

When the 29th June session began, the digital currency opened at $646.30, 2.5% higher than its opening value of $630.25 on 27th June.

In contrast, bitcoin prices surged 8.7% on 24th June, additional BPI data shows, when the yuan hit a five-and-one-half-year low against the dollar, an event mainstream news outlets like CNBC sought to correlate with economic activity in China.

Evidence and speculation

When asked by CoinDesk, market experts had different interpretations of bitcoin’s recent stability in the face of a falling yuan currency peg.

Petar Zivkovski, director of operations for bitcoin trading platform Whaleclub, went so far as to to proclaim that the idea yuan devaluation has any meaningful impact on price is "mostly a myth".

He added that while it has been used widely by the mainstream media, his firm sees "no evidence" of this occurring.

"Bitcoin is a purely speculative asset," Zivkovski asserted, adding: "Any news of a yuan devaluation, news which is becoming more expected and less surprising to the market, is merely used by traders as a pretext to buy, rather than actually driving any real demand by Chinese yuan holders.”

Another expert who spoke to the role of psychology in the market was Arthur Hayes, co-founder and CEO of bitcoin leverage trading platform BitMEX. Hayes contends that while China's actions increase sentiment, it's with international traders, not local buyers.

"The PBOC devaluation is an overarching narrative that influences traders' bullish or bearish sentiment," he said, adding:

"Chinese people are not buying bitcoin en masse to escape capital controls."

Temporary volatility

Past that, both Zivkovksi and Hayes spoke to temporary volatility, emphasizing how prices have fluctuated before quickly falling back or reverting to the norm.

Hayes provided some insight into the currency’s sustained price fluctuations, emphasizing how high volatility has been over the past few months.

As for where bitcoin will go in the near future, market experts who spoke with CoinDesk did not seem particularly bullish.

After enjoying a “meteoric” climb in the last few months, bitcoin is currently “under profit-taking pressure,” Zivkovski told CoinDesk.

Further, Zivkovski said this week's events provide evidence that the situation in China may not be strong enough to encourage new gains.

"The last three times China devalued its currency, including a couple of days ago, bitcoin's price rose temporarily but quickly faded as the market mean reverted to previous price levels,” said Zivkovksi.

He continued:

"This is an indication that yuan devaluation news is not powerful enough to reverse a trend and sustain a new one.”

Charles L. Bovaird II is a financial writer and consultant with strong knowledge of securities markets and investing concepts.

Follow Charles Bovaird on Twitter here.

Yuan and dollar image via Shutterstock