For some months now the Chinese economy has not been doing well. The value of the Renminbi, the Chinese currency, has been sinking, carrying with it the prices of stocks and derivatives markets to the lowest floors in years.
The downward trend came to a head on Thursday, January 7th, 2016. The day turned out to be the shortest trading day in the 25-year history of the Chinese markets. Market activities were halted 30 minutes into the opening to stop further decline in prices.
Stocks and currency markets in Mainland China and Hong Kong had witnessed a slump of up to 10%.
Many within the Bitcoin community have anticipated a major upswing in Bitcoin price as a response to this economic downturn in the world’s second-largest economy. The reasoning behind this being that Chinese investors will take their money out of the stock, derivative and financial markets and invest it in bitcoin to safeguard their wealth value.
As a matter of fact, on January 8th, the price of Bitcoin did go up by between 5% and 6% across major Bitcoin exchanges. This was thought to be the beginning of this significant upward trend.
Bitcoin prices are not matching to the situation in China
However, while stock, financial and derivative markets in China have not recovered in any significant way, Bitcoin prices and those of other cryptocurrencies are not reflecting that.
Instead of racing up, by the second week of January, Bitcoin prices were dropping significantly.
But why are Chinese investors not looking in the direction of Bitcoin at these difficult times when they should be?
Probably they are. But the lack of a bridge could be holding them from moving their wealth. In other words, they do not have ways of jumping ship.
How is that, you may ask. It is no secret that the Chinese authorities have over time made it hard for investors to exit the markets in the country. For instance, they have imposed caps on stock sales that one can offload and other measures to prevent capital flight.
Investors can’t exit nor buy bitcoin
Even more importantly, since 5th December 2013, financial institutions in China are barred from facilitating Bitcoin transactions. While it is not illegal to mine and own Bitcoins in the Asian country, exchanging them for fiat currency and vice versa is almost impossible at the moment.
That is not to say that there are no investors who are buying Bitcoins out of the scare that the Chinese recession has created. However, the number would have been significantly higher if investors in China had the option of selling stocks without hindrances and financial institutions were at liberty to facilitate transactions that involve cryptocurrency.
Having said that, the real impact on Bitcoin prices will come if the effect of the Chinese turmoil spreads to other markets outside the country.
It is evident that those in Europe and North America are already feeling the heat from the east. Oil prices have dropped to the lowest point in eleven years at one point in the first week of January trading below $30 a barrel, way below $200 that Goldman Sachs predicted in 2008. This is attributable to the reduced demand in China.
Nevertheless, the fall is not big enough to instill enough fear in investors out of China to make them seek alternative assets like Bitcoin, which in turn will send the prices of the latter on an upward trajectory.
To recap, the main reasons why the Chinese slump couldn’t have a lot of impact on the Bitcoin price, are controlled capital exit from the Asian country and difficulty in buying Bitcoin by domestic investors.
If other markets around the world catch the cold from China, Bitcoin prices could see wild upward movements.