Bitcoin hits two-year high as yuan worries drive Chinese demand

The price of the web-based digital currency Bitcoin, soared to a two year high on Tuesday, rising to more than $500 per unit, as worries on further weakening of the yuan  increased demand from China.

Trading volumes on the Chinese bitcoin exchange BTCC surged to three to five times their daily average since Friday, according to CEO Bobby Lee, as the Chinese savers have moved to protect their money against a further devaluation of the yuan.

Bitcoin is a web-based cryptocurrency that can move money across the globe quickly and anonymously with no need for a central authority. That makes it attractive to those wanting to get around capital controls, such as China's.

Around 95% of all the bitcoin trading is done via Chinese exchanges, according to the industry website Coindesk. So, any increase in demand from the Asian super power tends to have a particularly significant impact.

The yuan weakened to a 4 1/2-month low on Tuesday and recorded its second-biggest monthly fall on record in May. Investors reckon it will weaken further, given growing expectations for an increase in the US interest rates and signs that the China's credit-fuelled economy is slowing again.

"People are worrying about the PBOC (People's Bank of China) devaluing the yuan," BTCC's Bobby Lee said from Hong Kong. 

"If you're in China and you're holding onto the yuan, that's a huge risk, so they're buying into hard assets. Bitcoin is something that is very easily traded into, so that's what's happening," Lee added.

Despite being championed by some as the digital money of the future, bitcoin is often dismissed as too volatile to invest in. After rocketing above $1,100 in 2013, it then fell to around $150 in early 2015. But it has since recovered, and was the best-performing currency in 2015.

Bitcoin hit $548.50 on the Bitstamp exchange on Tuesday, its strongest since August 2014, leaving it up over 20% in the past week.

With around 15.5 million bitcoins now in circulation, the currency's market cap is at around $8.5 billion about the same size as Anglo American, a global FTSE 100 mining company.

Lee added that on his Chinese exchange, the price of bitcoin had at one point rallied above 4,000 yuan, or over $600. That was a sign investors sensed that the yuan was being artificially supported by the PBOC, he said.

NEW SUPPLY HALVING

Another reason given by bitcoin experts for the currency's latest surge is that in 40 days time, the number of new bitcoins that are added to the system every day will be halved. By the principles of supply and demand, that slower growth in supply should raise the value of the currency.

Instead of being controlled by a central bank, bitcoin relies on so-called 'mining computers' that validate blocks of transactions by competing to solve mathematical puzzles every 10 minutes. In return, the first to solve the puzzle and thereby clear the transactions is currently rewarded with 25 new bitcoins, worth around $13,500.

But when it was invented in 2008 by the mysterious, Satoshi Nakamoto, the code was designed so that the reward would be halved roughly every four years, in order to keep a lid on inflation. The next time that is due to happen is July 10.

"Bitcoin is days away from a reduction in its block reward, which will halve the daily supply coming onto the market," said Charles Hayter, CEO of London-based digital currency analysis website CryptoCompare.

Hayter added that after months of struggles over how to upgrade the software run by the computers that process bitcoin transactions — dubbed the bitcoin civil war — developers appeared to be reaching a consensus, which was also supporting the currency.

"Bitcoin is emerging battle hardened after a period of divisive governance issues and politics," he said. "Although not fully laid to rest, calmer waters look to be on the horizon as consensus on how to scale the network is appearing," Hayter said.