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China's Effect On Bitcoin's Price

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A lot of people that do Bitcoin investing (or other cryptos, for that matter, being that almost all of them are directly tied to Bitcoin in some way or another) appear to be confused about how much of an impact China's stance on the currencies makes. We have been seeing the prices swing up and down as China allows or disallows the currencies, but even so there are still people that do not seem to follow why this information is so important. Through this article, this is exactly what I want to take a look at. While I can not say for certain whether news one way or another will always have a strong impact on the prices of different coins, we can definitely say that it has impacted them in the past.

Bringing On Another Market

The value of anything is the price at which someone is willing to sell it, and someone else is willing to buy it. You can list your car for a billion dollars, but if it does not sell, that is not what its value is. If you list it for a dollar, though, and someone else offers up a thousand dollars, the value of it is a thousand dollars. This is because the buyer has essentially created the market. You can not have any value at all if there are no buyers; the items would just sit around waiting for either someone to offer up more money (or, rather, enough to purchase it) or the seller to lower their price.

Crypto currencies work the same way. The actual value of the coins is still unknown at this point (and it keeps fluctuating up and down considerably), because we are still trying to lock in on a price at which people are willing to sell and people are willing to buy. We have seen the price go up in value significantly in the past, only to spiral back down. While these situations can be considered as being the “spot values,” or values at any specific point in time, what we are more concerned with is where Bitcoin and other currencies are going. This is a big part of what makes the coins such a speculative investment. If you can guess what is going to happen and you are able to guess that accurately, you can make a lot of money. Conversely, if you guess wrong, you can lose a lot.

So why is all of this information so important? Well, because as more money flows in to Bitcoin, the more each coin is, theoretically, worth. Take, for example, the two following scenarios:

  • We have 100 coins and people have invested $1000 in to the economy. We can estimate that each coin is worth $10, because we will divide the fiat value by the number of coins (in this case, it is simply 1000/100, which leads us to 10)
  • We have 1000 coins and people have invested $1000 in to the economy. We can estimate that each coin is worth $1, because of the same rule as above (1000/1000, which gives $1)

In both of the above scenarios, we have two parts of the economy: the virtual (such as Bitcoin or another crypto currency) and the physical (which would be fiat). At any given time, we can estimate what the coins would be worth, as a whole, by taking the total fiat invested and dividing by the number of virtual coins. Now, it is well worth noting that this is a very strong generalization. The math behind it goes a bit deeper, as the prices go up and down as well. But the point behind it is that as more money is flowing in to the economy, the prices of the coins should continue rising. As more money is removed, it should lower to compensate. This is exactly what we have been seeing with China; as China releases negative news towards Bitcoin, its price has gone down. As it has released neutral or positive information, its value has risen. This is exactly what we should expect, as the people that reside in China are going to make their decisions based on what is and is not allowed there. As such, it all makes sense.

Watching the Money Flow

If you want to see where the money is going to Bitcoin from, rather than just speculating and hoping maybe you can figure it out, you can visit Fiatleak. That site will show a map, and as purchases are made using fiat, regardless as to what monetary system a country uses, it will show up there. This lets you see in real time what is happening with the currency, which countries are buying in the most (and what time of the day they are doing their buying), etc. And if you happen to be following the site, one of the things you are very likely to notice is that China accounts for a fairly large portion of the site's transactions. With that information known, it then makes even more sense why China's news would make the price of Bitcoin fluctuate so much.

A question that ends up getting asked is “how much does x country really matter?” This is a very tough question to answer, but the idea is that, over time, money will flow in to Bitcoin naturally. Faster adoption speed means more money thrown in it within a shorter period of time, but most of us believe that the money is coming to it regardless; it is just a matter of how long it will take. When looking at China's impact, then, it should not be taken as a negative thing. Sure, money is flowing out of Bitcoin at the moment, but over time, through natural adoption, it will increase. This, mixed with the fact that Bitcoin is designed to be a deflationary currency, rather than an inflationary one, is awesome news!

But Why Do Other Coins Tank As Well?

Almost every time that Bitcoin goes down in value, people ask why the other alt coins are going down as well. Almost every coin is based solely on the price of Bitcoin, and even require Bitcoin to be used as an intermediary between fiat and the coin in question. This causes a lot of issues when Bitcoin starts to tank, because it means the value of the other coins in fiat is already going down. What happens as a result is people start to sell off their alt coins (at the highest offers) to get to Bitcoin so that they can cash out before the price tanks even more. As these sales go through, the prices of the coins go down even more because nobody is buying. This ends up turning in to a pretty nasty cycle, up until Bitcoin does a turn around and starts to go back up in value again. Once this occurs, usually the prices of the alt coins will start to bounce back up as well.

Conclusion

Despite what a lot of people think, China has a very large effect on the price of Bitcoin. There is a lot going on with the economy, and more money (or less money) affects what each coin is worth. China is a large country with a lot of people that are throwing money in to the economy, which means they can drive the price up. Conversely, they can also drive it back down by pulling out. It is really no different than if we were to lose a lot of people from other countries that were investing, with the real separation being that China keeps bouncing back and forth (or at least their news media does) on the regulation of crypto currencies. As long as this keeps happening, the prices will also keep bouncing around.

Regulation


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