After two years of tit-for-tat tariffs imposed by the US and China on each other’s imports, a pattern has emerged between the weak yuan and strong bitcoin growth.
Impact of the US-China Trade War
In 2018 the Trump administration in the US imposed barriers and trade tariffs on Chinese goods because of what it called ‘unfair trade practices’, such as theft of intellectual property and the growing US trade deficit. In May 2019, the US increased tariffs from 10 percent to 25 percent on $200 billion of Chinese goods, with the Chinese retaliating with their own increases within days.
Chinese import tariffs went from their pre-January 2018 rate of 8 percent to over 20 percent by June 2019. US tariffs on Chinese goods grew from just over 3 percent in 2017 to over 24 percent by August 2019.
As the world’s two largest economies clashed in a bitter trade dispute, global growth decreased, with growth in the US and China the slowest since the financial crisis. By September 2019, US manufacturers were reacting to uncertainty by reducing capital investment and holding off on the hiring of new staff.
As China set the yuan’s rate at below $7 for the first time in a decade in August 2019, a corresponding spike in bitcoin price was recorded, an increase of 7 percent. A graph plotting bitcoin’s strength against that of the yuan from 2 April 2019 to 1 October 2019 shows surprising correlation in the peaks and troughs of each, with bitcoin mirroring the yuan’s performance, rising as the yuan falls and vice versa.
While it is hard to calculate Chinese investment in bitcoin, an increase in activity on crypto trading platforms popular with the Chinese suggests that investors there are selling yuan in favour of bitcoin, further weakening the yuan while boosting that of bitcoin.
With the US-China trade war causing the yuan to lose value, the Chinese may be choosing to shelter funds in bitcoin as uncertainty continues.
Bitcoin: a Turbulent History
Since its first exchange rate of $1 to 2300.03 BTC in October 2009, Bitcoin has been a rollercoaster ride. By February 2011 it had achieved parity with the dollar. Four months later it was worth over $31 and by November 2013 it had exceeded $1,000.
A couple of difficult years followed, with the seizure of some bitcoin currency during the closure of the dark web trading site Silk Road as well as negativity following hacking rumours.
2017 saw a bitcoin bubble, with the value soaring from $700 to nearly $20,000 by December of that year.
Falls followed in 2018, as South Korea banned cryptocurrency, Facebook banned cryptocurrency advertising and bitcoin mining became illegal in China, following the closures of many cyber currency exchanges there the previous year. The value of bitcoin at the time of writing is just over $8,000.
A Future for Bitcoin
Despite the US and China trying to reach an agreement aimed at providing some short-term relief, the main US complaints against China remain and it is likely that trade will continue to be affected for some time. With the resultant pressure on the Chinese currency, bitcoin in future is likely to continue in its role as a perceived safe haven for investor money.
With cryptocurrency set to increase globally, and many countries already working on creating their own version, it is only a matter of time before it becomes so mainstream that it is in daily use replacing cash.