With all the Chinese news happening over this last 6 months or so, I figured it was time to break a lot of that down into one article with the focus on how this is and may impact Bitcoin. First off I think there is a lot that the Bitcoin crowd doesn’t think about which could end up being issues in the long run.
The biggest point of concern is that as of December 2019, its estimated that China controls 66% of mining for Bitcoi and rapidly on the rise. This in and of itself is cause for concern considering the Coronavirus going on right now and the rumors of people getting purposefully trapped in their homes. As of today the virus just crossed over 1,000 deaths in China, its worth keeping a close eye on how this develops.
Next, we have the fact that the PBOC is developing its own central bank digital currency (CBDC) which should be of concern when you think about the fact that they state could just demand all mining to be shut down on Bitcoin. By now its clear to see that China loves to have the power and they could very easily just call to have this all shut down and Bitcoin mining would take a large hit for a least a few months while staunch supporters in other countries scrambled to setup mining rigs without China tech.
Store Of Value Argument
The ‘store of value’ narrative is often talked about now with Bitcoin, but to be fair I don’t think its really had a great test on big enough scale to really see how it holds up. I think we will get that test over the next few years, for now the best thing we can look at is how Bitcoin has responded to Chinese events.
I know people like to bring up hyper inflation in Argentina and Venezeula but those economies are small in terms of Internet access, Bitcoin available, etc. Most people in those countries only have access to 1 or 2 exchanges so the ease of getting it mixed with amount of internet access I think takes those countries out of the picture.
China on the other hand being a great example because mining, population, internet access, crypto exchanges etc, its one of the biggest economies in the world (if not the biggest) so it will serve as a pretty good bench mark.
I have just 3 events on there for now, the start of the Hong Kong protests (this is considered to be a Chinese nation so that’s why I cover it) which create uncertainty and unlike the EU protests which have been now going on for a year and a half, we were hearing about the Hong Kong protests every single day.
Which to be fair the Yellow Vest movement started in Nov 2018 and we had our bottom in Bitcoin Jan 2019 and since then BTC has added almost $6k per coin in value.
As you can see, Bitcoin was already on its way to a breakout from a technical standpoint but the protests came along at the right time. From that day Bitcoin continued to rally 267% into June 2019 before cooling back down.
Now the cooldown period lines up nicely with the early August debacle with the PBOC when they had to fix the Yuan daily for about a week as it broke its peg of 7 for the first time since 2008.
Here is what UBS chief economist had to say…
“China allowing the yuan to slide below 7 to the dollar is a watershed moment for currency markets that’s symbolically equivalent to the U.S. and other countries abandoning the gold standard in the interwar period, or the collapse of the postwar Bretton Woods system of fixed exchange rates four decades ago. The implications for the global economy are equally significant.”
The reason I say this lines up is because anytime you have a fiat currency getting fixed you usually see store of value assets like Gold go down. Strong currency, weak metals and vise versa.
Last point here to cover on that chart is this new Coronavirus that is quickly spreading all over China and the world with 1,000 confirmed deaths now in China and new cases popping up in the UK and France.
There are a few different dates I could’ve used here, first one could be the Dec 23rd date that WHO got the first data from Wuhan about it, and then we have the news really breaking on Jan 12th I believe. I stuck with that because that was the day on the ground in China that things escalated. So far, Bitcoin is responding to global uncertainty well I would say.
Take this all with a grain of salt, we all but completely ignored technicals and just running with China indicator.
Here is a look at the ROIs from these events both up and down.
Bitcoin & Black Swans
A black swan event would be the ultimate test of Bitcoin actually because not only would it be the best and clearest test for store of value but it might allow Bitcoin to clear its name of being a risk asset class, not as though it cares.
The downsides of a black swan would obviously be ‘how does one get their money out out of Bitcoin and into food and bills?’. In the US I think this would be incredibly difficult as most of the exchanges who are already pipped into the NSA would throttle if not completely stop all withdrawals and wires.
Again a black swan that triggers an economic slowdown would mean banks would tighten up on everything and were not even talking about any government capital controls. If banks still to this day regularly shut down bank accounts for buying crypto through Cashapp and Coinbase, then its safe to assume they would REALLY do that in times of crisis.
Yes there are some prepaid cards that charge super high fees and those might still work, Cashapp might still work and the handful of other ways to transact with Bitcoin still might allow some to get by, I assume there would be a large amount of people who can’t.
It makes me wonder how much Bitcoin could actually be bought as well, again assuming a black swan triggers a parabolic Bitcoin, American retail probably won’t be the biggest buyers in those circumstances.
Well it would appear we got our black swan not even a month after I penned this article and Bitcoin hasn’t responded well so far. It seemed to fall in tandem with the S&P 500 over the worst of the days. Coronavirus was known since at least January 20th but the panic didn’t really start in America until around the beginning of March.
It was at that point we saw the Fed increase their repo operations from accepting $100 billion per day to accepting $150 billion per day, we also saw an $8.3 billion stimulus bill get approved, we saw the Fed make an emergency rate cut of 50 bp and on March 13th Donald Trump declared a National State of Emergency which will allow him to supersede congressional approval on more money.
This is all pretty amazing actually, the arm chair analysts get to say “I told you so” as the markets slipped 24%, we have seen gold being extremely volatile and then we have Bitcoin which on the worst day of the stock market, it lost 55% and tumbled down to $3598, before rebounding back up to $5500 a few hours later.
To be fair, Gold also tumbled 5.84% which I am sure the gold bugs will claim that was suppression or manipulation. This proves that in times of panic (which is definitely the case right now considering people are buying up all the toilet paper in America) people prefer cash and bonds!
As I update this, China is reporting the lowest amount of daily cases and it seems to be back to normal at ground zero.
I have covered not only the Bitcoin halving but the Bitcoin 4 year cycle pretty extensively in my Ultimate Bitcoin Price Guide, but we do have the 3rd halving happening this year around May 23rd and it will be interesting to see if the 4 year cycle timeline is altered at all based on events in China or other countries that either speeds up the next bull run or slows it down.
I will be expanding on this, if you want to keep up then bookmark this page.
Is Bitcoin A Safe Investment
Bitcoin is a risk asset class that is driven by speculation just like most of the traditional markets, with much much more volatility, it is still unclear if it will become a worthy investment over time. I don’t think it has proven that just yet.
Bitcoin & Black Swan Events
Bitcoin just had the ultimate test this last week as the Coronavirus has started to take off in America and it did not fair well, crashing 55% in 24hrs before recovering 30%.