Capital Flight and the China Bitcoin Connection

There are quite a few theories as to why bitcoin has emerged from the bear market in recent weeks. But Barron’s writer, Avi Salzman, brought up a very interesting hypothesis. He interviewed a Chinese Over the Counter (OTC) Exchange Chairman who thinks the bitcoin jump has everything to do with “Capital Flight.” More than that, he thinks it’s a direct result of the looming trade war between China and the US. Find out why his theory stands out from other bitcoin price speculations.

The bitcoin jump

Bitcoin’s nice little spike to break the $5000 mark in early April gave all those crypto winter survivors a reason to celebrate. Following that, in early May we saw an even bigger increase with the price peaking over $8000 several times. Both times represented 2019 highs.

Immediately, everyone began trying to figure out the reasoning behind these most welcome jumps. The following list gives you an idea of some of the theories wafting about on the Internet:

  • It’s the institutional investors like Fidelity Digital Assets moving into the space.
  • We’re at an accumulation phase with both institutional and retail investors buying in.
  • Bitcoin scarcity is now more understood.
  • There’s usually an annual rise in bitcoin price right around Blockchain Week and Consensus in New York.
  • The Halving Event taking place on May 23 2020 is now in the news regularly. This also adds to the scarcity discussion.
  • Because of the limited supply of BTC, the only way for all the institutional investors (with all their corresponding money) to have some bitcoin is for the value to increase. That’s because even though bitcoin has a limited supply, it can still be divided infinitely.
  • As all of these things happen, FOMO increases, bringing more people into the market to buy BTC.

However, despite all these reasons, Avi Salzman’s article introduces a compelling argument for something else. Because of what he learned from an OTC Exchange executive, he thinks what’s infusing new energy into the crypto market is Chinese investors engaging in a massive Capital Flight. Let’s delve into a quick definition of the term and continue to break down this theory regarding bitcoin’s recent jump.

What is Capital Flight?

Capital flight refers to the large scale exodus of money, assets or capital out of a particular country. It could happen, for example, with the devaluation of a nation’s currency, political upheaval, or when defending against capital controls.

According to Investopedia, capital controls are defined as follows:

“Capital control represents any measure taken by a government, central bank or other regulatory bodies to limit the flow of foreign capital in and out of the domestic economy. These controls include taxes, tariffs, legislation, volume restrictions, and market-based forces.”

One clear example of capital flight would be a government who is in default of its debt. This would essentially lower their currency’s valuation in the eyes of investors. Those who’ve lost confidence pull their money out and invest elsewhere.

Often this happens on a large scale. Usually, this situation is followed by a big price drop in that country’s currency exchange rate. Further, the departure of money on such a scale from a country could very well go on to impede future economic growth in the region, making a bad situation even worse.

Other examples of capital flight might sound quite familiar given the world news in the last week. In one instance, it would be when a country imposes sanctions against another nation. A second would be the developing trade war between the US and China. This last one could be the impetus for the recent capital flight in China and the subsequent jump in bitcoin price.

How China’s Capital Flight is different

In the case of the China-bitcoin connection, Capital Flight takes on an entirely new meaning. Because money is not flowing out of China at all. It’s just flowing into a different currency – bitcoin, which happens to have no geographic boundaries.

In Salzman’s interview of Mint Exchange Chairman Harpal Sandhu, he learned what was happening in Chinese OTC markets. According to Sandhu, Chinese investors have been moving Yuan into bitcoin on a large scale. His view is that this exodus is in anticipation of a trade war with the US. Just this past week, after reports of more new tariffs, the Yuan saw drops in its value against the US dollar as well as against the Yen.

It’s also possible that the Chinese will continue to strategize more ways to further devalue the Yuan if tensions escalate. That would ultimately reduce the costs of exports for the Chinese, thus easing the trade war from their perspective.

How much are Chinese investors buying into bitcoin?

Mint Exchange’s Chairman Sandhu describes the Mint Exchange as a clearinghouse for retail and institutional traders who want to access a worldwide market. Because many exchanges globally are involved with the order flow, Sandhu is able to pinpoint where heavy volumes are happening. During these same few weeks, while bitcoin was pumping, these heavy volumes were occurring on the Mint Exchange during Asian trading hours.

In fact, according to Sandhu, “daily crypto volume on Mint Exchange tripled in the past two weeks, to $59 million this past Sunday.” He went on to explain that the selling was so intense that some exchanges experienced outages. Due to the sheer number of transactions, this led Sandhu to believe that there are many small trades happening. This is a signal that retail investors are a major driving force in this capital flight.

Forbes reported that since last month, these trade movements have caused a weakening of the Yuan by 3%.

Will history repeat itself?

Interestingly, in the same article, Forbes writer, Bryan Rich reminds us of another time the Chinese dealt with capital flight. But to understand that, we need to go back a few years.

The Chinese have long imposed restrictions on Chinese citizens as to how much money they can move out of the country – $50,000 per person per year. But many wealthy investors were getting around the limit through complex foreign investments and other schemes. According to Rich, the Chinese government then had a big crackdown to stop these illegal activities.

This crackdown happened at exactly the same time as when bitcoin had its monumental surge in Q4 2017.

As Rich stated, during that period, “China cryptocurrency exchanges were said to account for 90% of global bitcoin trading.”

As Dave Waslen, CEO of HedgeTrade, explained, “After China banned Chinese exchanges in 2018 from access to banking services, these exchanges nevertheless saw continued growth in volume and market cap. Using stablecoins like USDT-Tether began to provide a go-to strategy for Chinese investors seeking to liquidate their assets. Since USDT is pegged to the US dollar and offers excellent liquidity, stability, and transference options, it has since become a huge Bitcoin rival in terms of transaction volume.”

Time will tell us how big this exodus will end up being and what the aftermath will look like. But this is the second large exodus of Chinese investors to cryptocurrency. Will there be more?

China’s biggest banks are already big on blockchain tech while the government is talking about a national cryptocurrency. And speaking of China’s banks, of the top ten banks (by assets) in the world, the top five are Chinese.

So it would seem that now what we have is a capital flight into a cryptocurrency. Apparently for the second time in Chinese history. And we also have the flight ending up in a borderless currency. Flying right into a brand new asset class. As per usual in this industry, we have to wrap our head around things formerly unimagined.

In closing

We’ve seen many suggested reasons for the bitcoin spike in recent weeks. Capital Flight really caught my eye out of all of them. Why? Because when I heard the term ‘Capital Flight’ for the first time, I instantly thought: Investors are flocking to bitcoin. Upon reading Barron’s article and researching capital flight in depth, it certainly seemed a plausible reason for the BTC jump.

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