How China’s Currency Could Impact Bitcoin in the Near Term, Says Bitwise Exec

by

The conversion rate between the Offshore Chinese Yuan (CNH) and the US Dollar is drawing significant attention from international investors, as it gets close to a crucial level of 7.368.

On January 7th, 2025, André Dragosch, who serves as the European Head of Research at Bitwise Asset Management, shared insights on the social media platform X regarding a significant topic. He elaborated on why it’s important and hinted at possible effects that might transcend traditional markets, potentially impacting Bitcoin and the entire cryptocurrency sector.

China’s national currency, the Yuan, exists in two versions: the On-Shore Yuan (CNY) and the Off-Shore Yuan (CNH). The On-Shore Yuan is primarily used within mainland China and is controlled closely by the People’s Bank of China (PBoC), China’s central bank. On the other hand, the Off-Shore Yuan is traded outside mainland China in financial centers like Hong Kong, where it is more affected by market trends. Consequently, the Off-Shore Yuan serves as a valuable gauge for international investors assessing China’s economic stability.

In simpler terms, the value of the Yuan compared to the U.S. Dollar shows how strong or weak the Yuan is. When the Yuan becomes weaker (has a higher exchange rate), it suggests decreased trust in China’s economy or increasing financial troubles. Dragosch’s post indicates that the People’s Bank of China is making an effort to keep the Offshore Yuan above 7.368. This means they are working hard to prevent the Yuan from becoming weaker than this level, as doing so could cause additional economic stress.

The People’s Bank of China (PBoC) has various methods to impact the value of the Yuan. According to Dragosch, there are two primary strategies. Initially, the PBoC establishes a daily reference point, or “fixing,” for the Yuan’s exchange rate. By adjusting this fixing downward, the PBoC indicates its aim to bolster the Yuan. Secondly, the central bank eliminates surplus Yuan from the banking system by means such as selling foreign currency reserves or issuing central bank bills. This action makes the Yuan less abundant, thereby increasing its worth, which in turn aids in maintaining exchange rate stability.

These actions, though they strengthen the Yuan, also introduce further complications for the economy. Stricter cash flow could potentially restrict banks and corporations from obtaining funds easily. This situation arises as the economy is already grappling with existing hurdles, such as difficulties in the property market, manufacturing, and consumer expenditure. Dragosch has highlighted that preliminary economic data indicates an increasing likelihood of recession in China.

Should the Yuan surpass the 7.368 mark, China’s central bank might have to ramp up its efforts to maintain currency stability. This situation could exacerbate liquidity issues, resulting in what Dragosch calls a “Yuan shock.” Such an incident may trigger a swift and significant depreciation of the Yuan, with potential repercussions on worldwide financial markets.

For cryptocurrency traders, these advancements are essential. Traditionally, times of Yuan instability have been linked with growing curiosity in Bitcoin as a form of value storage. Despite China’s capital restrictions making it difficult for direct crypto access, a substantial depreciation might encourage Chinese investors to explore alternative assets such as Bitcoin.

A “Yuan shock” might spark wider volatility across conventional financial sectors, offering both dangers and chances for crypto investors. Bitcoin tends to mimic risk-associated assets such as stocks during initial market downturns; however, it may subsequently gain from its status as “digital gold” and a safeguard against instability in fiat currencies. Furthermore, the depreciation of the Yuan could put pressure on other emerging market currencies, possibly boosting demand for Bitcoin in countries exposed to devaluation threats.

Read More

2025-01-07 16:48