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Bitcoin Price Breaks $US500 Barrier. Thanks, China.

Michael Hudson
31 May 2016

As someone with a vested interest in Bitcoin, its adoption and its price, I’ve not slept much since Friday. In the last 96 hours, the price of bitcoin has smashed through the $500 mark in Western markets for the first time in nearly 2 years. It’s undoubtedly an exciting time for anyone with a bitcoin holding watching the value increase with such vigour. But the underlying factors are what I find most fascinating.

While the newswires are abuzz with the People’s Bank of China decreasing fixing by another 0.45% to the US Dollar, pushing the Chinese Yuan into its largest decline since August 2015, it’s my opinion that this has served merely as a trigger to release the pent up tension that’s been building in bitcoin for about 7 months leading up to the weekend rally.

The ongoing strategy of the Chinese government and central bank to devalue their currency essentially means that investors’ portfolios are suffering. Returns are weaker and they’re looking for alternative options. Unfortunately for the Chinese, they’re subject to stringent capital controls and face massive obstacles in moving currency out of the country.

Much like Greeks and others who’ve had access to their funds restricted or prescription on what they can do with their money, Chinese investors have sought the safe haven of bitcoin – a currency that circumvents these regulations and ensures control remains in the hands of the individual. And with those Chinese individuals holding about US$30 trillion in deposits, there’s a lot of currency looking for a new place to rest.

‍Chart from Bitcoincharts showing the surge in bitcoin price over the last 4 day period.

As big-economy governments continue to implement and adjust monetary policies that place additional strain and losses on their citizens, they fuel dwindling confidence in traditional currency and central banks, a key fundamental factor driving people to explore the digital version, bitcoin. We can see evidence of this occurring heavily in the Chinese market at the moment, with bitcoin trading at a premium of between US$40 and US$70, indicating strong demand, and aggressive contribution to the overall price rise.

This bullish turn is most welcomed, and as there’s little to suggest that economic policies will change tack in the short- to medium- term, we can expect to see continued upwards movement in bitcoin price, equating to exponential returns on our bitcoin investments.

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