Bitcoin’s Correlation with the People’s Bank of China Balance Sheet

Recent analysis indicates that the price of Bitcoin (BTC) has closely followed the growth of the People’s Bank of China’s (PBOC) balance sheet over the past eight years. This relationship is highlighted by a significant positive correlation, particularly visible in the 30-day correlation coefficient, which stands at 0.66 according to TradingView data. A correlation coefficient above 0.6 indicates a strong relationship, suggesting that as the PBOC’s balance sheet expands, so does the price of Bitcoin.

Historically, this correlation has remained positive, with exceptions noted in 2016 and from late 2022 into 2023. Conversely, Bitcoin currently exhibits a -0.88 correlation with the Federal Reserve’s balance sheet, marking the lowest level since 2016. This stark difference suggests that Bitcoin’s price movements are increasingly influenced by Chinese monetary policy rather than U.S. monetary policy.

The People’s Bank of China and its Monetary Policy

As of now, the PBOC oversees approximately $6.22 trillion in U.S. dollars on its balance sheet. In response to economic challenges, the central bank recently announced plans to inject up to 1 trillion yuan (roughly $142 billion) into its largest state banks. This move is aimed at enhancing their capacity to support the struggling Chinese economy. The PBOC also implemented a reduction in the reserve requirement ratio for mainland banks by 50 basis points, alongside a decrease in the seven-day reverse repo rate from 1.7% to 1.5%. These actions underline the PBOC’s commitment to stimulating economic growth and addressing rising unemployment.

Impact on Bitcoin and Other Risk Assets

Bitcoin’s price has responded positively to these developments, gaining nearly 3% this week and over 10% for the month, as reported by CoinDesk. This growth corresponds with a broader uptick in Asian stock markets, particularly in China, where the CSI 300 Index surged by 4.5% on a recent Friday, contributing to a remarkable 16% gain for the week—the largest increase since 2008.

Market analysts, including Nick Ruck, suggest that the influx of capital from the PBOC’s stimulus efforts could lead to an increase in investments in blockchain technology and cryptocurrency-related startups. As liquidity increases, select funds may also seek to enhance their exposure to crypto-related investments, particularly in stock-listed firms and exchange-traded funds (ETFs) based in Hong Kong. This potential for increased investment indicates a broader trend where Bitcoin and other cryptocurrencies are viewed as viable assets in a diversified investment portfolio.

Global Risk Asset Sentiment Shift

The stimulus measures from China have not only impacted Bitcoin but are expected to benefit a wide range of risk assets in the financial markets. Augustine Fan, head of insights at SOFA, commented on the situation, noting that the recent surge in U.S. equities—hitting new all-time highs (ATH)—has been supported by aggressive stimulus measures aimed at revitalizing the Chinese economy. This has led many macroeconomic observers to adopt a bullish outlook on risk assets globally, reminiscent of the easy-money days during the quantitative easing (QE) era.

Investor sentiment has shifted towards a “buy the dip” approach. This change indicates that investors are increasingly willing to take risks, favoring assets like Bitcoin that are seen as having high potential returns. The ongoing correlation between cryptocurrency prices and equity performance suggests that Bitcoin’s value will continue to rise in tandem with improvements in the stock market. As the market rallies, the outlook remains optimistic, with few immediate downside catalysts in sight.

Conclusion

In summary, the relationship between Bitcoin and the PBOC’s balance sheet illustrates a complex interplay of monetary policy and cryptocurrency valuations. The recent actions taken by the PBOC to stimulate the economy are likely to have lasting impacts on Bitcoin’s price trajectory, as well as on other risk assets. As investors navigate this evolving landscape, the correlation between these markets will be crucial in shaping future investment strategies.