The devaluation of the Chinese yuan and the financial impact of Brexit are long-term factors which will determine the health of the economies of China and the UK.
Thus, investors will continue to seek for alternative highly liquid assets to avoid being involved in a financial turmoil, which will increase the demand for Bitcoin and ultimately, its price.
Economic instability is good for Bitcoin
Financial experts and analysts have emphasized the indirect correlation between the demand for Bitcoin and international economic instability for quite some time.
In early 2016 for instance, legendary veteran investors including Marc Faber stated that with the exception of Bitcoin, all asset classes have performed poorly.
During an interview with Bloomberg, Faber suggested that the independence and decentralization of Bitcoin benefits from the plummeting value of government and economy reliant assets.
Amidst major financial troubles involving the fall of Chinese and Korean stock exchanges, and the slump of major international stock markets, the value of Bitcoin has continually grown since January of this year, with the digital currency almost doubling in price.
A similar pattern was noticed after the UK announced its independence from the European Union (EU) and the Chinese yuan reached a five-year low in mid-June; the price of Bitcoin gradually increased, from the US$600 margin to the current price of US $650 per Bitcoin.
Panic mode
Naturally, when political or economical decisions hugely affect a nation’s currency, investors turn into “panic mode” to purchase safety assets.
These valuable properties include gold and Bitcoin. Each form of money has its own advantage; gold is one of the least volatile assets in the world today, while Bitcoin—despite its extreme volatility—is one of the fastest growing assets in the market today, in terms of market cap and size.
Thus, when a political event like Brexit cause the British pound to plummet or the Chinese government’s decisions lead to the devaluation of the Chinese yuan, increasing number of investors gear towards safety assets which hold substantially high liquidity.
Popularity of Bitcoin in China
On May 30, Chinese Bitcoin exchanges observed a surge in the volume of Bitcoin trades, which immediately pumped the price of Bitcoin by nearly 16% over a period of four days. Analysts suspected that because of the tightened financial regulations established by the Chinese government, investors were turning to Bitcoin to send money out of the country.
Joe Zhang, former manager at the People’s Bank of China and the chairman of China Smartpay Group, also weighed in on the increasing popularity of Bitcoin in China, stating that Bitcoin is becoming a popular hedge against the devaluation of the Chinese yuan.
Zhang says:
“Meanwhile, the stock market in China remains one of the most expensive in the world, despite the crash in mid-2015. So it is small wonder that Bitcoin is becoming a popular hedge against the steady erosion of the yuan’s purchasing power.”