When the yuan slides, Bitcoin climbs. While not an iron rule, that inverse relationship between China’s currency and the world’s dominant cryptocurrency has held true for much of the past year, and it recently reached its strongest level on record, according to a Bloomberg analysis of the 30-day correlation between the two currencies.
The strengthening of the relationship between a relatively weaker yuan and relatively stronger Bitcoin suggests that the yuan is being used as a hedge (i.e. protection) during a trade war that could exert a hefty toll on the Chinese economy. It also illustrates investors’ broadening acceptance of cryptocurrencies, despite being relatively new and unregulated investment vehicles that makes them subject to fraud and bouts of volatility.
What It Means for Investors
That Bitcoin is being used as a safe haven amid economic uncertainty as the trade war with the U.S. weighs on China’s economic growth is not an implausible theory, according to Dr. Garrick Hileman, a researcher at the London School of Economics and Blockchain.com’s research director.
“There’s corroborating evidence for this, in that people in Asia were paying more for Bitcoin than elsewhere when the yuan fell,” he said. “You can see it in the premium price paid sometimes for Bitcoin in exchanges like Huobi that primarily cater to Chinese.”
The negative correlation between the two currencies became increasingly evident back in the spring when it reached its last peak at around -0.58 (a reading of -1.0 represents a perfect inverse correlation). At the end of August, that inverse relationship reached its recent record of around -0.67, according to Bloomberg.
The timing of the spike in the negative correlation in May appears to have coincided with the Trump administration’s announcement to raise tariffs from 10% to 25% on $200 billion worth of Chinese goods. China retaliated just days later with an announcement of its own tariff hikes.
Throughout the month of August, both countries engaged in trade hostilities with various threats and rhetoric, including the U.S. labeling China a currency manipulator for letting the yuan sink to its lowest level in 11 years. At the end of August, announcements of tit-for-tat tariffs were exchanged, precipitating the recent peak in the inverse relationship between China’s currency and Bitcoin.
While both the trade war and China’s slowing economy seem to be prompting investors to dump yuan in favor of Bitcoin, there is another factor driving the phenomenon—the increasing legitimacy among investors of digital cryptocurrencies. In July, a local court ruling in China stated that Bitcoin was a virtual asset to be protected by Chinese laws. That’s the first time any local court has reached such a ruling, according to Bloomberg.