Bitcoin suffered a roughly 30% drop before recovering somewhat yesterday after word hit the market indicating Chinese regulators would no longer allow payment processors to serve bitcoin exchanges. Doubts about the validity of such statements have increased since their announcement, with little official word seen yet from regulators or payment companies. Incidentally, at least two of the largest CNY exchanges happened to drop their zero-fee trading on the same day, offering initial insight into how much free trading was bolstering the recent Chinese market presence.
Yesterday morning, reports began surfacing on Chinese microblogging sites indicating the country’s top payment processing companies were called to a closed meeting with the PBOC where they were told they would be forced to sever ties with digital currency exchanges before the Spring Festival (in January). The news appeared to be substantiated by a number of Chinese exchanges switching to exclusive use of smaller, lesser-known processors and has since been reported by China Business News.
Whatever the case may be, yesterday’s activity led to a number of unique market dynamics. One of the most notable is that CNY markets traded at the greatest discount to USD markets since China exploded onto the scene two months ago.
BTC/CNY has generally trended to a roughly 5% premium to USD, rarely trading even flat to one another. Even during the market drops associated with the initial PBOC statements on Dec 5, CNY markets maintained their premium. Yesterday’s fall marked a definitive change in that trend, with CNY markets trading at a roughly 10% discount to USD.
Historical trends could certainly lead one to believe this is a drastic cross-market mispricing, though yesterday’s reinstatement of fees may have something to do with this. BTC China and OKCoin, China’s two largest exchanges by volume, both eliminated the free trading they’ve offered for most of the past two months.
CNY exchanges likely also saw significant capital flight yesterday as traders looked to secure their funds before payment processors remove their ability to transact seamlessly. If the rumors turn out to be unfounded, the discount of CNY markets relative to USD would likely trend closer the norm over time.
Fees may also already be impacting the distribution of global trading volume, as basic supply/demand dynamics would dictate. Yesterday was one of the few days in the past six weeks where USD volume outpaced CNY. Notably, the same also occurred on December 6, following the original PBOC announcement, so it won’t be clear whether or not this is a trend for until further data points are available.