Lately we have been trying to predict big finance houses’ arrival into the world of cryptocurrencies, but we are neglecting the equally important factors linked to the current situation in this market, which could rock the boat much earlier than that.
The last time we discussed the subject was last February, when we noted in this article a strong recovery in the Chinese bitcoin market that everyone was considering to be an agonizing one.
Here is a brief summary.
In September of 2017, China caught the world by surprise, closing all the exchanges linked to cryptocurrencies on its territory.
Given the magnitude of the amounts involved, which suddenly seemed to have lost their lifeblood, at the time – as usual – the press delivered a death sentence for bitcoin and all related matters.
And, again as usual, this alleged tragedy only tickled the crypto world.
To understand at a glance what I am saying, check out the small black rectangle in the chart below:
That short section of lateral market was the only shudder triggered by the Chinese government. A negligible event in the long history of bitcoin, which however at the time had shocked the most naive investors.
After six months, in fact, our story already reported that the Chinese had resumed trading in cryptocurrencies, while, more importantly, the exchanges which had been reported as dead had increased their activities, so much so that they had climbed the global ranking for transactions.
To date, this situation has not changed.
In fact, looking at the best markets for bitcoin in USD, once again the Chinese exchanges are at the top (red arrows below):
First in the standings was Binance, the exchange born two months before the great – and useless – Chinese purge and which, being already in Hong Kong, was the first to welcome the traffic fleeing from mainland China.
Following are Okex and Huobi, given for dead in 2017 and resurrected after moving their headquarters to that same location, paving the way for ZB.Com, again from Hong Kong and Simex, based in Singapore.
Compared to them we have circled in red Coinbase, the exchange from the big U.S. finance everybody (including ourselves) is talking about, but that in the end is not yet as influential as you may believe.
This helps us to understand why the question of the entering of the great capitals from Wall Street might not be so important in the immediate future.
Transactions related to China are so significant that any event able to rock the boat in those parts could end up in the newspapers long before the hesitant big guns over on Wall Street.
And to tell the truth, something interesting on the horizon is starting to appear…
It is not a coincidence that we decided to deal with the matter at this very moment.
In order to understand what is happening, let’s look once more at the chart posted above:
We are simply linking the trend of the Yuan (red line) with that of bitcoin (black line).
First of all, let’s follow the black line.
The first major bitcoin bubble, bursting between 2013 and 2014, is included in the diagram in the first triangle on the left, which shows, in the final and strongly bearish phase of the bubble itself, a distinctive technical configuration in which the highs and lows tend to move closer and closer to each other until they generate a reversal of the downturn and the resurgence of the upward trend in the long term.
Basically, the triangle means that that bubble does not end in disaster, but rather will create a long and progressive bullish market.
Now, the same triangle configuration was highlighted in the second big bubble, which burst at the end of 2017, the final phase of which we are still seeing today.
Many analysts think that even in this case, as in 2014, the next phase after the sharp downturn will consist of a long bull market, repeating the same scenario.
The similarities between the two bubbles, in 2014 and 2017, have already been commented on in many articles in specialized magazines and it is one of the most used topics by those who expect the next bull market.
So far, however, this analogy had been above all based on statistical data (i.e. on the technical and cyclical analysis of bitcoin prices) to which at best some considerations were added regarding the next possible entry of Wall Street’s capital, as mentioned above.
No one had yet identified a factual economic cause linking the two bubbles.
A cause that, instead, the above chart seems to suggest, especially if we start to follow the red line.
There, in fact, a blue circle to the left of the chart highlights an event that in 2015 had shaken Wall Street, namely the sudden devaluation of the Yuan decided by the Chinese central bank.
At the time, the Chinese carried out this devaluation overnight, it’s true, but in good faith and as a simple precautionary measure.
In fact, there was, and still is, an unwritten agreement between China and the USA whereby the Yuan and the U.S. dollar should always go hand in hand, in order not to upset the planet with overly striking currency imbalances.
If, therefore, the U.S. decide to re-value the U.S. dollar against other world currencies, China must in turn re-appreciate the Yuan against Asian currencies.
Going back to the left of our chart, since in 2015 the Chinese were warned of the U.S. program to re-value the U.S. dollar in the long term (until 2017), the central bank is preparing to undertake a similar re-evaluation against Asian currencies.
However, in order to be sustainable, this needs for the Yuan to start at a lower point than the one it was at.
For this reason the Chinese went for a sudden depreciation, a strong one, but short-termed, so that the following re-evaluation would start from the bottom, so to speak, not to get overly high in the long run.
Later, as shown by the red line, from 2015 to 2017 the U.S. dollar has always been re-evaluating on the Yuan. Therefore, the Chinese government, in order to avoid a vertical collapse of the Yuan, has re-evaluated it in a similar way towards other Asian currencies.
The Chinese people, however, had other priorities in mind.
The Chinese do not care about the exchange rate of the Yuan against other Asian currencies, but rather about the exchange rate of the Yuan against the U.S. dollar.
For them, the Yuan-U.S. dollar depreciation implies a loss of purchasing power, even if at the same time the Yuan re-evaluates against other Asian currencies.
That’s why, faced with the depreciation of the Yuan against the U.S. dollar that lasted until the end of 2016, the Chinese did nothing but change the Yuan against U.S. dollars over the same period and later.
That year, in fact, there was much talk of the Chinese capital flight from the Yuan and the government’s futile measures to contain it.
And it was also said that one of the systems used by the Chinese people to evade government controls was to place their savings in the cryptocurrency circuit.
This is why our graph shows, immediately after the great Yuan de-evaluation of 2015 and throughout the period of the heavy de-evaluation of the Yuan against the U.S. dollar (red rising line), the great Chinese hunger for bitcoin that triggered the long and progressive upward phase of this currency, culminating in the bubble of 2017 (black ascending line).
Now, looking at the right side of the red line, in 2017 the chart finally stops climbing and a progressive decline begins, indicating that the Yuan has gradually recovered against the U.S. dollar, thanks to the change in U.S. policy against its national currency.
If, however, thanks to this re-balancing with the U.S. dollar, throughout 2017 the Chinese have not had the desire to preserve their purchasing power, they have not ceased to increase their presence in the cryptocurrency market (perhaps due to lack of confidence in the long-term stability of the Yuan) to force the government to close all exchanges on their territory.
This is why, during the descent of the red line (i.e. the revaluation of the Yuan against the U.S. dollar), the bitcoin rise did not stop, but rather resulted in the 2017 bubble (generated by many other triggers that are included in the underlying Chinese trend).
So we get to the present day, that is to the final phase of the bubble, where at a particular point, at the top of the triangle in which the 2017 bubble is located, looking again at the red line, we’ll notice something unusual.
In fact, it seems that in recent days the red line has rocketed again.
What happened?
What happened was that the Chinese central bank suddenly decided to depreciate the Yuan even more than back in 2015.
But unlike in 2015, this time the depreciation was not in good faith and in agreement with the U.S. central bank in anticipation of some re-evaluation by the U.S. dollar.
This time, the depreciation was a harsh response to Trump’s trade war against China.
And even if almost all analysts claim that China can’t depreciate the Yuan for long without suffering repercussions in the domestic and Asian markets, the fact is that the country has come to play its most extreme moves with Trump, which include its own currency.
China may not be able to undertake a constant and regular de-evaluation, but it will certainly be able to create other short-term shocks that would once again weaken the Chinese’ purchasing power.
As I said, this sudden depreciation is in the terminal phase of the bitcoin bubble (top of the triangle) just as the 2015 one was at the top of a similar triangle that included the previous one.
So the Yuan situation could provide a concrete economic argument to the pure and simple statistical hypothesis of the similarity between the two bitcoin bubbles.
In a nutshell, if the rise following the burst of the 2014 bubble was generated by the Chinese’ attempt to secure their savings in the crypto market, an almost equal situation could arise in the coming months, once the US-China trade war forces the central bank into other currency shocks on the Yuan and pushes the Chinese to increase their exposure in regards to cryptocurrencies.
The timing and graphic similarities are impressive.
And they speak of a situation much closer in time and perhaps more substantial than the quirks of the Wall Street players.
The Chinese (I’m talking about the Chinese people, not their government) have always had great influence on bitcoin and have been supporting this market for more than five years.
What’s happening East of bitcoin, therefore, is worth monitoring while all of the media are focused on the SEC, ETF, Wall Street, and other stuff that currently matters too little still.
Like many analysts in the sector, we too are anxiously anticipating and waiting for the next bullish crypto phase in the market.
However, we are beginning to think that this may come from China, as it has already been the case in the past.
Besides, do to the extreme lows made by the market over the past months, I think there is no better time to invest than this, before the opposite trend strongly brings the market back to a new and highly profitable bubble.
The best way to take advantage of the next upturn is to invest in smaller coins, which have an enormously higher growth potential during bubble phases.
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