Bitcoin to $700 and Beyond

Figure 1.

Bitcoin has started to gain a significant amount of traction this past month with the devaluation of CNY. Previous blog articles (USDCNY 7.00 Equals Bitcoin $1,000 and Yuan Internationalisation and Bitcoin) have discussed why the Yuan is currently going through a devaluation process, where it is headed, and what it means for Bitcoin. If you want to save time, just look at Figure 1.

Figure 1 above shows Bitcoin / USD (an average comprised of Bitstamp, Coinbase and OKCoin USD), Trading Volume, and the offshore CNH and the onshore CNY exchange rates. The trend is up and to the right. CNY had the first large official devaluation on the 10th October (CNH surged higher the week prior), and in less than 20 days it has moved 10 fen or about 1.5%. Bitcoin has gone from trading at $605 at the start of this month, past the ominous level of $666, and through $680 towards $700.

Figure 2 below shows the same Bitcoin spot price against its Volatility and the China Premium (scaled up 15x). When Bitcoin / USD is viewed against these variables, a similar up and to the right trend appears. Below is a table with the observed correlations.

Correlation CNY Trading Volume Volatility
Spot USD 0.25 0.16 0.71

Figure 2.

What’s happening with the rest of the world outside of Bitcoin? In spite of the continued devaluation of the Yuan, financial markets remain in risk-on mode. When viewed against the USD Index which strenghtened 3.6% in the past month, the Yuan is still relatively overvalued. [WSJ]

December presents the perfect time for the Fed to raise said Federal Reserve Bank of San Francisco President John Williams. [WSJ] The US election circus concludes in under two weeks. In addition, US economic data contiues to improve. That is why the odds of a rate hike are north of 70%.

Will the financial markets crash if the PBOC devalues CNY above 7.00 by December? It might take much more muscle this time around to force Gradma Yellen to duck and cover.

To take advantage of this, buy XBTZ16 futures contracts expiring 30 Dec 2016 at 12:00 UTC. Currently the annualised premium is trading at 28%. By historical standards, this is quite low for a contract with 2 months of remaining time value. Expect this to blow out if we see continued price appreciation in Bitcoin due to a weaker Yuan.