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There is a theory circulating in the cryptocurrency industry that the escalation of the US-China trade war has caused the Bitcoin price to spike. For instance, the theory was put forward by DigitalX CEO Leigh Travers who believes the spike may be caused by Chinese wealth being pumped into Bitcoin as a ‘safe haven’ due to the current financial insecurity issues between the countries.
The US-China trade war has been escalating recently with tensions rising. Before we can take a look at how this is manipulating the price of Bitcoin, we first need to understand how the trade war came to be.
US President Trump has made some strongly worded statements about China before and during his campaign trail for the presidency. For example, Trump said this at a 2015 rally:
“I beat the people from China. I win against China. You can win against China if you’re smart. But our people don’t have a clue. We give state dinners to the heads of China. I said, ‘why are you doing state dinners for them? They’re ripping us left and right. Just take them to McDonald’s and go back to the negotiating table.'”
On May 1, 2016, he said this:
“We can’t continue to allow China to rape our country, and that’s what they’re doing. It’s the greatest theft in the history of the world.”
In 2017 the US launched an investigation into Chinese trade policies.
In July 2018 the US implemented the first tariffs against China. The US collects 25% on 818 imported Chinese goods valuing US$34 billion. Less than a week later another tariff was imposed, for 10% on over 6,000 Chinese commodities, valued at US$200 billion.
By August, President Trump deemed that these commodities should be subject to a 25% tariff rather than a 10% one and said he would implement this in January 2019. More tariffs were imposed in August, and in September 2018 Trump threatened new tariffs.
By Mid-September China retaliated with their own tariffs on US$60 billion worth of US goods and canceled trade talks set up with the US.
The trade talks were resumed in November 2018 and in December 2018 the countries agreed to a temporary truce – no tariffs would be increased for 90 days. This move did seem to work at de-escalating tensions and China bought 1.5 million tons of US soybeans (China had stopped purchasing soybeans from the US when the trade war began). Trump also decided not to raise the tariff on commodities from 10% to 25%, and it remained at 10%.
The US and China continued meeting for negotiations in early 2019 and by March 2019 Trump said that he would extend the truce beyond the March 1 deadline.
In April 2019 China banned all types of fentanyl. Fentanyl is a synthetic opioid drug that is 50 to 100 times more potent than heroin. This was a significant move in terms of peace between the countries since China is a major producer of fentanyl and fentanyl is contributing to the US’s opioid problem.
In May 2019 relations go south again when Trump threatened to raise the commodity tariffs to 25% on May 10. The US went ahead with the change and China threatened “necessary countermeasures.”
On May 13 2019, China announced it would increase their tariffs on the US$60 billion worth of US goods in response to the US’s actions.
Putting Pressure on China
The US and China both have a lot to gain financially from cooperation but China’s huge economic growth as well as their behavior as a growing world superpower has caused the US to become wary of what the future holds. It’s fair to say the US isn’t happy about China’s militarization of the South China Sea, its questionable human rights records, history of intellectual property theft, and state-funded cyber activities.
The US is trying to take a stand against these activities by attempting to cripple the Chinese economy and bend China towards being cooperative on sorting out these issues. The logic here is that if China has been getting away with doing these things for so long, it will only continue and the US will be less able to stop them if the Chinese economy continues to grow.
Bitcoin Price Driven By Chinese Investors
Many figures in the crypto world hold the position that the recent spike in Bitcoin price is being driven by Chinese investors in response to the trade war. Since the latest round of the US-China trade war, the Chinese Yuan has fallen to a four month low against the US dollar. This is creating a period of financial insecurity for China as Chinese investors become worried that problems will continue to escalate and are more cautious. Travers, for example, said:
“Chinese and expatriate Chinese around the world are contributing to the recent rise in the price of Bitcoin. They are seeing Bitcoin as a hedge against the falling Yuan.”
The fall of the Yuan suggests that Trump’s plan is working, and the Chinese economy is suffering from the trade war. That isn’t to say that the US is unaffected by it, they are, but China appears to be suffering more.
Societe Generale, one of the largest financial services groups in Europe that is also active in the crypto sphere, predicts that the latest round of tariffs could see China’s GDP lowered by 0.5%, and the US’s by 0.25%.
On May 15, Chinese state broadcaster CCTV aired a segment and released an accompanying editorial, explaining China’s stance on the issue:
“The US is fighting a trade war out of greed and because it wants to show off. They have to keep boasting while they fight it, if they don’t boast or make up stories, their morale will die down at any moment. China, on the other hand, is fighting back to protect itself. We know why we are negotiating, and why we need to keep on fighting even if we don’t reach a deal… China and its entire population are being coerced.”
Chinese citizens with some wealth are likely highly concerned about the current US-trade war and the direction it’s heading in. The US has escalated this war, backed down, and now escalated it again and the result is a falling Yuan. It makes sense that Chinese citizens would want to diversify their portfolio and put some of their money into cryptocurrency to ‘wait out the storm’. The phrase “even if we don’t reach a deal” probably escalated worries further – it doesn’t display any confidence in the notion that the US-China trade war will be coming to an end any time soon, but rather that it may continue for some time.
With tensions continuing to escalate, we have no way of knowing whether this latest round of tariff hiking is just the beginning and the Yuan might continue to be targeted by the US.
Travers isn’t alone in this theory and many other analysts have agreed with him. Most financial analysts agree that the US-China trade war has been a factor in the Bitcoin price hike, but how big of a factor is still disputed.
“Bitcoin is often referred to as digital gold and we are currently seeing the digital currency performing the same role in the market as physical gold amidst an investor flight to safety.”
Admittedly, it does make sense. If one cannot trust the conventional world of finance and investment, one just might choose an alternative path – the Bitcoin path.