That's because, historically, the cryptocurrency looks to have put in a positive performance during bouts of weakness in the Chinese currency.
The yuan (CNY) fell to 7.1613 per U.S. dollar earlier on Tuesday to hit the lowest level since early September and taking its cumulative month-to-date and year-to-date losses to 1.4% and 2.85%, respectively.
The decline to eight-month lows could be associated with concerns about the U.S. response to China's proposed security law for Hong Kong and the resulting haven demand for the greenback. U.S. Sen. Marco Rubio (R-Fla.) put out a tweet late Tuesday stating the U.S. would impose sanctions on China if the nation presses forward with implementing the controversial Hong Kong bill.
"If China's CNY continues to weaken against USD, then we could have a 2015 and 2016 repeat, where BTC strength coincided with yuan weakness," tweeted Chris Burniske, partner at venture capital firm Placeholder.
The above chart shows bitcoin and USD/CNY moving in tandem in 2015 and 2016.
In August 2015, the People’s Bank of China (China’s central bank) surprised markets by devaluing CNY by 3.5%. The Chinese currency ended 2015 with an over 5.5% loss against the dollar, while bitcoin gained 34%.
Another wave of yuan devaluation rocked financial markets in early 2016 and the currency ended that year with a 7% loss. Again, bitcoin rallied by nearly 125%.
So there appears to have been a correlation between the two assets in 2015 and 2016. However, correlation does not necessarily imply causation, meaning there may or may not be a cause and effect relationship between the two.
Some analysts have long argued that CNY depreciation leads to increased flow of money into bitcoin from China.
For instance, CNY fell below 7 per dollar for the first time in 10 years on Aug. 5, 2019, amid the U.S.-China trade war. On that day, bitcoin rallied by 7% and the uptick began an hour before the yuan dropped below the key level. As a result, some observers, including prominent analyst Alex Kruger, wondered whether bitcoin had front-run the slide.
“Last year we witnessed flows from CNY to BTC during the trade tariff saga,” Matthew Dibb, co-founder of Stack, a provider of cryptocurrency trackers and index funds, told CoinDesk Wednesday.
Skeptics, however, would counter that claim by saying the uptick seen on Aug. 5 was short-lived and the cryptocurrency suffered sharp losses in the following four months despite the yuan’s continued decline to new multi-year lows near 7.20 per dollar.
Essentially, the positive correlation between USD/CNY and bitcoin did not hold ground in the second half of the last year. Furthermore, both bitcoin and the yuan suffered losses in 2018.
It could be argued the yuan slide seen in 2015 and 2016 merely coincided with the uptick in bitcoin, which was fueled by the bullish frenzy surrounding the cryptocurrency’s second mining-reward halving, which took place in July 2016.
Nevertheless, it may be worth keeping a close eye on the ongoing CNY slide as the narrative that yuan depreciation leads to increased outflows from China is still quite strong. Further, in the crypto markets, bullish narratives have a tendency to become self-fulfilling prophecies, as evidenced by bitcoin’s pre-halving rally.
Bitcoin a macro asset
In addition, bitcoin may be more sensitive to developments in the yuan market this time round, with the cryptocurrency now a macro asset class this year following an increase in institutional participation.
“It’s no longer possible to analyze the crypto market without analyzing the rest of the macro markets," Messari analysts said in their Tuesday's newsletter. "The 2020 recession officially marks the beginning of bitcoin as a macro asset class. For retail investors and institutional investors, crypto isn’t the only asset class in their portfolio. Therefore, it’s crucial to look at crypto from a portfolio allocation perspective."
Indeed, legendary fund managers like Paul Tudor Jones II have recently thrown their weight behind bitcoin, seeing it as a hedge against inflation.
"Bitcoin reminds me of gold when I first got into the business in 1976," Jones said. Gold, a precious metal with limited supply, tends to gain value during bouts of fiat currency devaluation.
Some analysts expect CNY to slide further on escalating U.S.-China tensions and power gains in the cryptocurrency.
“As the USA and other countries retaliate against China's proposed security law, our expectation is to see a continued depreciation of the yuan, while BTC could benefit once again as a local and liquid safe-haven asset alternative,” said Dibb.
Meanwhile, Phillip Gillespie, CEO of B2C2 Japan, told CoinDesk he is personally bullish on bitcoin due to the combination of excess money printing by central banks and pick up in geopolitical risks.
"I expect serious anti-Chinese rhetoric in the coming days/weeks/months as [U.S. President Donald] Trump tries to use nationalism/protectionism and anger towards China as a major catalyst for support," said Gillespie, while adding that we would soon find out whether there's a positive correlation between USD/CNY and bitcoin returns.
Bitcoin holds steady
While the expectations may be bullish, so far, the cryptocurrency has not been able to gather upside momentum.
At press time, the cryptocurrency is trading near $8,930, representing a 0.29% drop on the day. The short-term technical outlook has turned bearish following Sunday’s break below an ascending trendline connecting the March 13 and April 21 lows.
While Clem Chambers, founder and CEO of financial markets website ADVFN.com, believes the premise for bitcoin strength amid the yuan's weakness may be valid, he's concerned liquidity coming into bitcoin will remain low in China for some time due to coronavirus outbreak.
"I think BTC might have its new short-term range in place, but we will have to wait [a few weeks] till the second virus wave ... if there is one, and that seems likely, to gauge what happens next," said Chambers.
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